Raising Capital in the Payments Industry: How to Leverage Your Residuals Without Losing Equity

By Jon Engleking(5 min read)

Introduction: Raising Capital in the Payments Industry

For Independent Sales Organizations (ISOs), PayFacs, and merchant service providers, monthly residual income isn’t just cash flow — it’s an asset. Those recurring payments from your merchant portfolio represent years of relationship-building, processing volume, and trust.

When growth opportunities arise, that steady stream can be one of the most powerful tools you have to raise capital — whether through debt financing, equity investment, or, in some cases, selling a portion of your residual stream.

Understanding which option to use — and when — can mean the difference between short-term liquidity and long-term enterprise value.

1️⃣ Using Residuals as Collateral for a Loan

How It Works

Lenders that specialize in the payments industry understand the true value of recurring residual income. They evaluate your historical monthly residual income, type of merchants, and attrition to determine your company’s credit strength and portfolio health.

If your business shows your residual income is consistent and processing volume is predictable, you can often qualify for ISO financing or a residual loan — essentially borrowing against your monthly residual stream.

For smaller organizations, these loans are typically structured at 10–15x monthly residuals. For larger ISOs or PayFacs with access to more traditional payment industry capital sources — such as banks, debt funds, or family offices — funding amounts are generally based on a multiple of EBITDA.

This type of financing allows you to tap into your portfolio’s value without giving up equity or long-term ownership.

Pros

• ✅ Retain full ownership of your business and future income

• ✅ Access capital quickly without giving up equity

• ✅ Use funds to expand sales, invest in tech, or acquire smaller ISOs

• ✅ Maintain long-term enterprise value

  
  

Cons

• ⚠️ Requires strong, predictable cash flow and low merchant attrition

• ⚠️ Adds leverage — not ideal in uncertain economic periods

• ⚠️ May require personal or corporate guarantees

  
  

Example: Using Residuals to Expand Without Giving Up Equity or Cash

An ISO generating $50,000 per month in stable residuals secures $500,000 in ISO financing to acquire another portfolio producing $20,000 in additional monthly residual income. The loan is structured as a residual loan with a 48-month term and an estimated payment of around $18,000 per month.

In this scenario, the existing residual stream services the debt entirely — no out-of-pocket cash required. After four years, once the loan is paid off, the ISO retains both portfolios free and clear, increasing total equity value by approximately 30% (or $500,000) — all without selling ownership or giving up long-term enterprise value.

This type of payment industry capital strategy allows growth through acquisition while preserving the most important asset: your recurring income..

2️⃣ Raising Equity: Selling a Stake, Not the Stream

How It Works

Instead of borrowing, you can bring in investors who contribute capital in exchange for partial ownership — often between 10%–40%. The capital can be used to scale operations, hire leadership, or fund acquisitions.

Pros

• ✅ No debt repayment pressure

• ✅ Gain experienced partners and valuable industry connections

• ✅ Can increase valuation multiple if structured properly

Cons

• ⚠️ Dilutes ownership and future profit share

• ⚠️ Can create friction if investor expectations differ

• ⚠️ More complex governance and reporting

Example: Raising Equity to Accelerate Growth

A fintech company raises $1 million in equity at a $5 million valuation. The investor takes a 20% ownership stake, providing both capital and access to high-volume referral partners and co-branded merchant acquisition programs — channels that help the company double monthly processing volume within 24 months.

As a result, the company’s overall valuation increases to $10 million, and the original shareholders’ value grows by 60%, even after dilution. This demonstrates how raising equity strategically can accelerate revenue growth and expand enterprise value far beyond the initial capital raised.

3️⃣ Selling Residuals: A Last Resort — or the Right Move at the Right Time

How It Works

Selling Residuals as a Strategic Capital Decision

Selling your residuals can provide immediate liquidity — typically 24–36x monthly residual income, depending on portfolio stability, attrition guarantees, and perceived risk. It’s a clean transaction: you sell your future cash flow to a buyer and receive a lump sum upfront.

However, selling residuals should be considered a strategic capital decision, not a quick-fix funding option. It’s rarely the first move — and should only be done if:

• You’re exiting the industry, or

• You cannot secure debt or equity financing to fund an opportunity expected to generate at least a 30–50% return within 24 months.

  
  

Your residual stream is the single largest driver of your company’s enterprise value. Selling it outright should only happen when the ROI on reinvestment clearly outpaces the long-term value of the income stream you’re giving up.

In short, if the sale enables you to multiply value faster than the time it would take to rebuild your residual base, it can be strategic. Otherwise, it’s like selling your foundation to build a new roof.

Pros

• ✅ Immediate capital infusion

• ✅ No repayment or investor involvement

• ✅ Can simplify operations if preparing for a pivot or exit

Cons

• ⚠️ Permanent loss of recurring income and equity value

• ⚠️ Harder to rebuild valuation after selling residuals

• ⚠️ Potential tax implications

Strategic Example: Selling a Portion of Residuals to Fund Growth

An ISO generates $100,000 per month in residual income and identifies an opportunity to onboard a new client with multiple retail locations — a deal that requires a large purchase of POS devices and onboarding infrastructure.

Unable to obtain debt or equity financing, the ISO decides to sell $20,000 of monthly residuals (20% of the portfolio) for approximately $500,000, based on a 25x multiple. This provides the upfront capital needed to fund the hardware purchase and implementation costs for the new client.

Within 12 months, the new account is projected to generate $30,000 per month in additional residual income, representing a 50% increase in monthly revenue and enterprise value.

In this case, the ISO used a partial residual sale as a strategic investment rather than an exit. By reallocating a portion of future income into a growth opportunity that delivers a higher ROI within 12–18 months, they effectively transformed liquidity into leverage — without taking on debt or selling ownership equity.

4️⃣ Which Option Fits Your Strategy Best?

Scenario	Best Fit
You need short-term working capital	Borrow against residuals
You’re scaling with strategic partners	Debt and/or Raise equity
You’re pursuing a high-return opportunity	Debt, Equity, or Partial residual sale
You’re exiting the industry	Sell residuals at a premium multiple

Final Thoughts

Your residual stream is more than your monthly income — it’s the foundation of your company’s equity value. Used wisely, it can unlock growth, acquisitions, and partnerships without compromising long-term value.

At PMT Growth Partners, we help payment industry leaders design capital strategies that balance liquidity, risk, and enterprise growth — whether through debt, equity, or selective residual sales.

The goal isn’t just to raise capital — it’s to deploy it intelligently to accelerate sustainable growth.