Growth Capital & Financing
Access to capital continues to be a challenge for many privately held payments companies. Traditional lenders (banks) do not clearly understand the nature of merchant acquirer assets. That being said, sponsor banks for registered ISOs will from time-to-time offer loans or lines of credit, but it’s usually for more established merchant acquirers with large merchant portfolios (typically 4,000 merchant accounts or more) and a healthy, new accounts onboarded to accounts lost ratio.
Where traditional banks (and sponsor banks) have left a hole in the marketplace for growth capital and/or acquisition financing for merchant processing ISOs, private equity and the largest merchant acquirers (and processors) have stepped in. They have done a good job at providing equity financing for payments companies, and/or allowing merchant acquirers to monetize their most valuable asset – their merchant portfolio.
However, times have changed, and have done so in a favorable way for merchant acquirers. Revenue-based and direct lenders (those who lend on cash flows, aka “alternative lenders”, have proliferated, spurred on by the explosion in private credit (post pandemic). They’re ubiquitous today, and they fully understand the merchant acquirer revenue model.
This new development provides merchant processors, en masse, with the option of procuring much needed growth capital without having to sell their business or liquidate their merchant portfolio. This access to non-dilutive capital is a fantastic option for entrepreneurial payments company founders and operators.
Because we at MP have decades-long relationships with asset managers, hedge funds, private equity firms, family offices and venture capital firms, it’s allowed us to smoothly transition to the dedicated private credit funds who are actively looking to allocate to the payment processing space. Hundreds of funds are competing to put capital to work, and find strategic partners for distribution.
This comes with a caveat…
Unlike their equity financing peers, the rigor required to properly forecast payment company cashflows for private credit funds is formidable. The specialized financial modeling needed to accommodate market coverage ratios and determine the present and future valuation to determine an accurate loan-to-value ratio (LTV) necessitates deep domain expertise from professional analysts who are well versed in the nuances of payments processing. Also, different payment modalities and new technologies need to be accounted for in these models to ensure they are accurate, further establishing credibility with this type of lender.
If you’re in the market for growth capital, acquisition financing, or capital for a restructuring, please reach out and request a consultation to help identify the optimal strateg
