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Pioneering the First Merchant Cash Advance

October 13, 2016
Small Business, Small Business Loans
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The rise of the merchant cash advance industry coincided with the rise of online small-business lending. Yet the person who pioneered advances has more in common with St. Louis roofer Cory Elliott than any Silicon Valley startup founder: She was a Connecticut businesswoman looking for a way to smooth out seasonal revenue dips in her child play-group centers.

In the late 1990s, Barbara Johnson was running four Gymboree Playgroup & Music franchises. Unable to get working capital to fund a summer marketing campaign, she wondered whether she could borrow against future credit card sales from parents bringing their kids back for fall classes.

Future receivables as an asset

How it would work: The merchant cash advance provider would purchase an agreed-upon percentage of future credit or debit card sales. The receiver would repay the advance daily, and if sales volume dipped or rose, so would the payments. Johnson and her husband, Gary, co-founded Advance Me — the original name of CAN Capital — in 1998 and patented the technology that allowed the splitting of credit card sales.

“She realized the great asset she had in hand was future receivables — a predictable revenue stream from folks who wanted to place their kids in Gymborees,” says Dan DeMeo, the current CEO of CAN Capital. “We were also able to pioneer as a company this concept of daily remittance.”

» MORE: Merchant cash advances — ‘It’s the wild west out there’

Technology and data open the door

The bite-sized repayment plan appealed to borrowers. And the credit card sale-splitting technology that enabled it also gave CAN a daily peek inside each merchant’s business and opened up a river of data for analysis.

This helps CAN “design products that are tailored to times of seasonal need, expansion, marketing programs,” DeMeo says.

For years, there were few other players in the market. AmeriMerchant — now Capify — emerged in 2002, and Advance Me later sued it and its founder, David Goldin, alleging violation of its payment patent. Goldin successfully countersued to overturn the patent in 2007.

“That opened up the floodgates,” Goldin says. Merchant cash advances now generate $5 billion to $10 billion in loans each year, industry officials estimate.

Kevin Voigt is a staff writer at NerdWallet, a personal finance website. Email: kevin@nerdwallet.com. Twitter: @kevinvoigt.