‘Twas the Day Before New Year’s for Funders
December 31, 2015
‘Twas the day before New Year’s, and all through the floor
The staff was busy catching up, but being pushed for more
Submissions kept coming, most missing some stips
The most simplest of standards, the brokers always miss
The underwriters were dizzy, crunching numbers for hours
Getting hustled for approvals because they hold all the power
And management holding meetings, going over collections
Returns and defaults, and next year’s projections
When out of the blue, there arose such a clatter
The originators sprung up to see what was the matter
An announcement being made, attentive they listened
“Employees of the company!” said a face that glistened
With cheer in his eyes, and a non-familiar glow
Everyone was excited and frightened at the same time to know
He continued to explain, news that was both bad and good
Reflecting on the year, in terms they understood
With a lot of fluff talk, numbers, and percents
They knew at that moment, how it all made sense
Understanding their roles, and those who contribute
Appreciating their time and how they distribute
Now, closers! Now, admins! Now, marketing and relations!
Now, underwriting and sales! Anyone who had patience!
To the breakroom! To the breakroom with you all!
And they all huddled in, without an argue or a brawl
There on the table sat a wonderful spread
Snacks and desserts, more than enough to be fed
Stuffing their faces with enough food for two
The staff laughed and chatted though there was so much to do
“We can’t take a break! there’s so much to complete!”
“Though this is more than I ate all this week!”
This much is true- as many don’t know
They don’t leave their desks often, like elves at the North Pole
So back to their seats, with plates by their side
Back to reality, but they did it with pride
The realization of all of their hard work
It isn’t all that bad when you look at the perks
As the manager swung by to view his whole team
He realized it too, what isn’t always seen
It takes more than just one, it takes more than just vision
It takes a plan and people, to carry out the mission
As the time grew later, he knew what to do
Since nothing was funding in the late afternoon
He had another announcement which he said with great cheer
You’re all getting out early and have a Happy New Year!
Year of The Broker Concludes – 2015 Recap
December 31, 2015
It was the Year of the Broker, a phrase that often conjured up images of easy money and inexperience. Lenders like OnDeck reacted by reducing their dependence on them. Responsible for 68.5% of their deal flow in 2012, OnDeck only sourced 18.6% of their deals from brokers in the third quarter of 2015.
But there’s money being made. One broker is on pace to do more than $100 million worth of deals annually after working as a plumber eight years ago. Another went from sleeping in his car to driving a Ferrari. Meanwhile, brokers like John Tucker are basically saying just the opposite. Tucker has repeatedly taken to AltFinanceDaily to preach things like “minimalism,” a practice of living below your means to a point where you can survive, and telling everyone it’s okay to embrace the satisfaction of a middle class life.
So is it the end of days or just the beginning?
In October, initial survey results of top industry CEOs revealed a confidence index of 83.7 out of 100, but out there on the street for the little guy, it’s been a tumultuous year. Things like commission chargebacks have hit brokers at unexpected times, with several funders privately telling us over the year that rogue brokers have closed their bank accounts or frozen the ACH debits in order to avoid giving the commissions back.
In 2015, brokers sued their sales agents and sales agents sued their employing brokers. Deals got backdoored, deals got co-brokered, and soliciting deals anonymously got banned from industry forums. Stacking continued mostly unfettered but is being pursued in the court system by funders allegedly injured by it. Brokers took over Wall Street and are supposedly being watched by regulators. Oh, and robo-dialing? Brokers should probably steer clear of that, just as underwriters should ditch paper bank statements.
It’s a lot to manage. Sometimes for a broker, just losing a deal can make them so sick that they have to go home. That’s apparently what happens when you don’t answer the phone fast enough. At least one said there’s no room left for more competitors so if you were thinking of starting a brokerage now, $2,000 won’t be enough.
But things could be worse. In 2015, IOU Financial was under attack by Russian nuclear scientists, a story that was more truth than exaggeration. In the end, Qwave Capital acquired a 15% stake in IOU.
An OnDeck class action lawsuit that looked bad at first turned out to be mostly based on the words of a convicted stock manipulator with a short position in the stock. The case is still ongoing and OnDeck’s stock price is down 50% from their IPO.
In 2015, two guys lost God but found $40 million (although numerous sources say that number is off).
“Madden” no longer means the football video game and Section 1071 is not a seating area in a stadium.
An RFI turned out to be something not to LOL about. Despite an overwhelming response from lenders and funders, the Treasury isn’t completely sold.
Things weren’t so automated in 2015 despite the cries of technological disruption. Maybe that’s why it feels like 1997. Manual underwriting still dominated and bank statements still matter as much as they ever did. God declined loan applications, Google rigged the search results, and a mayor declared war on merchant cash advance (and then never spoke about it ever again after being re-elected).
Lobbying coalitions formed. NAMAA became the SBFA. The CFPB lied and community bankers testified.
But things are looking up. Brokers can obtain outside investments, get acquired, or make millions through syndication.
Bad Merchants are now ending up in more than one bad database, though a deal for the ages slipped through the cracks. Other merchants went to jail. Square went public and brought merchant cash advances along with them. The industry beamed its message through Times Square and one Democratic congressman has asked God to bless it all.
It was a crazy year. Marketplace lending became an acknowledged term (and the name of a conference) and already companies under that umbrella have been linked to presidential candidate (and desperate loser) Jeb Bush and the San Bernardino Terrorists. The FDIC had a few things to say and SoFi went triple-A. Marketplace lending is making a lot of people money, but when looking at the tax implications is there something funny?
In 2015, the big boys shared their wisdom and their figures. Turns out, it was beyond hyperbole. Brokers experienced an incredible rise or they pawned their ferrari to the other guys. Some focused on a specific crop, while others are trying it over the top. California sucked, John Tucker tucked, and one lender got totally F*****. In 2015 some funders got tanked, so in 2016 we’ll all be AltFinanceDaily.
Happy New Year!
All in The Family (The MCA Kin)
December 20, 2015
FAMILY TIES
During the holidays we get together with our family to reminisce on the good times, celebrate achievements, and be thankful for life’s fortunate moments. Most of the brokers within our space have families of their own to tend to during the holidays, which might include a large family gathering with relatives flying in from outside of the area, or it might just include a peaceful dinner with a small assembly.
But this has surely been the Year of the Broker, and what many of these new entrants might not realize is that the product we sell all year round (the merchant cash advance) has a family as well. While the MCA doesn’t exchange “gifts” with its kin, it sure does have a lineage that dates back to the 1600s, which makes the product something born out of a family of products, rather than something that seemingly just sprung up out of nowhere one day in 1998, by a company formerly known as AdvanceMe.
ALTERNATIVE FINANCE AND PURCHASING REVENUES HAVE BEEN AROUND A LONG TIME
- (The 1600s): The product is nothing but a purchase of future revenues or receivables, where a merchant is going to sell their receivables or future revenues to a purchaser, with a particular factor rate or “discount rate” applied to the transaction. This act is nothing new at all, as it has been around since the 1600s but didn’t become more common practice until around the 1800s in terms of the United States.
- (The Middle Of The 20th Century): The MCA is an alternative finance option from more boutique/niche firms, compared to the traditional products of terms loans and lines of credit from retail banks and credit unions. Alternative finance as a “comprehensive term” has been used in a mainstream fashion since the middle of the 20TH century, so this “act” is nothing new.
- (The Newborn): In other words, the merchant cash advance product is just the most recent “birth child” from a long and storied “family dynasty” of alternative financial services and revenue purchasers.
FAMILY GATHERING
The “family members” of the merchant cash advance include a variety of alternative financing vehicles that are popular and not as popular as others. For this article in particular, I wanted to discuss some of the more popular “family members” which include A/R Factoring, A/R Financing, P/O Financing, Equipment Leasing, Asset Based Lending and the Alternative Business Loan. This article will provide a general overview of each “family member”, which will serve as an introduction to a future article where I will go into specific sales strategies for many of the listings.
ACCOUNTS RECEIVABLE FACTORING
This product is based on a merchant having outstanding commercial receivables that are aged less than 60 – 90 days. With Factoring, the factor (buyer) is going to purchase the outstanding receivables from the merchant (seller), taking them off of the merchant’s balance sheet as an asset and onto the balance sheet of the factor. During the purchase, the factor advances about 80% of the amount purchased upfront to the merchant, with the remaining 20% coming after the merchant’s client base completes payment within 30 – 90 days, minus a discount fee of anywhere from 1% – 5%. Non-recourse factoring transfers the risk of the clients not paying the balances in full to the factor, while recourse factoring keeps the risk contained to the merchant.
ACCOUNTS RECEIVABLE FINANCING
This product is also based on a merchant having outstanding commercial receivables similar to Factoring, however unlike Factoring, there will be no purchase of the outstanding receivables but instead they will just be used as security/collateral for a financing arrangement.
PURCHASE ORDER FINANCING
This product is based on a merchant having outstanding purchase orders where a lender provides funds so a merchant can order materials to fulfill orders. Then once the orders are fulfilled, the lender collects a fee for service. This can also be done in the form of a vendor line of credit, where the lender opens a credit line with the vendor to allow the business to get materials needed to fulfill upcoming orders.
EQUIPMENT LEASING
This product basically allows a merchant in need of commercial equipment, technology, machinery, vehicles, tools, and furniture, to lease it rather than buying, as certain pieces go obsolete rather quickly and wouldn’t make sense for purchasing. The merchants are provided lease factor rates based on A-D credit grades, with options at the end of the lease to buy the unit(s) for $1.00, give them back, or start another lease period.
ASSET BASED LENDING
This product is based on a merchant having a particular type of pre-owned asset of appraised value, that could be used as security/collateral for a financing arrangement. The aforementioned Accounts Receivable Financing product can also be considered an asset based lending product, but also included are pre-owned pieces of equipment which could be used for sale-leasebacks or other items such as luxury vehicles, real estate, precious antiques and jewelry.
ALTERNATIVE BUSINESS LOAN
This product is similar to the merchant cash advance, as it’s based on a merchant having a particular consistent amount of monthly revenue, and approved as a percentage of annual gross revenue. The product can come from lenders that also offer merchant cash advance products or lenders who solely specialize in this alone.
AS A FINAL NOTE, MAKE SURE TO REMEMBER THE MCA’S VALUE
While the MCA is the baby in the family, don’t let its “youth” undermine its value. An MCA could potentially cost more than a loan, but a merchant might not be eligible for a loan or a loan might not be available fast enough to take advantage of a market opportunity. Merchants might not have assets available for collateral, eligible accounts receivable, and they might not issue invoices to customers on terms. That means merchants might have better luck with some family members than others just based on their business model or circumstances.
Happy Holidays.
The Broker’s Future Part Two
December 16, 2015THE ROBOTS ARE COMING
Merriam-Webster and Dictionary.com both agree, that a “robot” is a machine that is created to do the work of a person, carrying out a complex series of actions automatically, all controlled by a computer. Sometimes a robot can resemble a human being in likeness, but often times a robot is simply a piece of software, a piece of hardware, a piece of machinery, or a cloud based infrastructure called the internet (online networks). Professor Kaku is a futurist from City College of New York, a futurist is someone who makes what one would consider “fairly accurate” predictions about what the future holds and how these future events might emerge from present day events. Professor Kaku believes the following:
The job market of the future will consist of those jobs that robots cannot perform. Our blue-collar work is pattern recognition, making sense of what you see. Gardeners will still have jobs because every garden is different. The same goes for construction workers. The losers are white-collar workers, low-level accountants, brokers, and agents.
A RECAP OF PART ONE
Back in June 2015, I did an article for AltFinanceDaily about the Broker’s Future, speculating if the good times were indeed over for the brokers as it pertains to their level of profitability and survivability going forward.
- I examined the 2000 – 2007 and 2008 – 2013 time periods, speculating that the “Era of the Broker” was indeed between the 2000 – 2013 period.
- Then, I examined the current time period which begins around the middle of 2014, that is seeing so much of a mass new entrance of brokers into the space, that AltFinanceDaily had to compose a cover story on the phenomenon for the March/April edition of AltFinanceDaily Magazine. The only issue with this current time period is that, in my sole objective opinion, we are in the “Era of the Strategic Networks”, and no longer in the “Era of the Broker.”
- I concluded the article in June with the following: those just now trying to come in and ride the wave will soon discover that just like with the Stock Market, the real money has already been made and most of the future returns are already capitalized.
AN INTRODUCTION TO PART TWO
My analysis shows that the current time period is all about Strategic Networks, which are mainly three networks to be exact, which include the following, all designed to produce competitive market advantages, positioning, strategies, qualified leads, etc:
- The Center Of Influence Network: this includes entities such as banks, credit unions, processors, accountants, VCs, credit bureaus, etc., that allow access to exclusive leads, exclusive data, equity financing, debt financing, mergers, etc.
- The Mom and Pop Network of random independent agents across the country who resell on a 100% commission basis, providing free marketing in a way that collectively they produce a significant amount of volume (even though individually most of the agents cannot make a living from this activity).
- The Online Network with exclusivity on the growing online marketplace of merchants seeking financing, education and options via the internet.
For Part Two Of The Broker’s Future, I want to focus in on The Online Network, which in my opinion will be one of the main destroyers of opportunities in our space for the majority of brokers going forward.
DEATH OF A B2B SALESMAN
For about $499, you can read a very comprehensive report from Forrester on the death of B2B salespeople. Forrester predicts that by 2020, over 1 million B2B salespeople will lose their jobs to the growing force of IT/Robotics, which includes various forms of technology, automation and of course the internet in general through E-commerce.
In relation to our industry of merchant services, merchant cash advance and alternative business loans, I don’t believe that we have to wait until 2020 to see significant changes, I believe these changes are already in full effect and the major players within our space are the ones that are truly capitalizing on The Online Network, giving them major exclusivity on the growing online marketplace of merchants seeking financing, education and options via the internet.
MERCHANT SERVICES HAS BEEN AFFECTED
The Online Network phenomenon has totally destroyed the feet on the street MLS (merchant level salespeople) over on the merchant services side. Before the rise of the Online Network, MLS were valuable to merchants as information on merchant processing, interchange, how the bankcard transactional process worked, etc., were not readily available and most banks did not handle direct sales of the service. So the MLS would park their car down the street, randomly walk into merchant locations, and provide the education via brochures, terminal samples, etc.
They would explain how the merchant processing process works, how accepting credit cards could boost sales through more impulse purchases and consumer convenience, and more. The MLS would then go over the different options of payment processing technology, commit the merchant to a 24 – 48 month lease of the technology, and make his/her commission off the leasing sales and eventually also off the residuals. However, the rise of the Online Network completely shattered this business model:
- The Online Network now allows the merchant to comprehend merchant services on his own, without the help of the MLS, by researching interchange and conducting his own “rate analysis”. The merchant can also now see the true cost of the processing equipment, thus to no longer sign up for leases for $100 a month for 24 months ($2,400) for a $350 terminal at best.
As a result, the MLS can no longer prospect on “rate savings” nor prospect based on the equipment such as through leases or even through free terminals anymore, due to the merchant’s knowledge that the terminal is worth $350 at best. As a result, the direct sales of merchant services has become a value-add to other services, requiring yesterday’s MLS to transform into something totally different such as a financing or payroll specialist, trying to convert merchant accounts over on the side, as part of the sale.
ALTERNATIVE LENDING HAS BEEN AFFECTED
The merchant cash advance and alternative business loan products are more popular today than they have ever been before, due mainly to the massive media attention that they have received with companies going public, CEOs landing interviews on major media outlets, talking heads debating the products across a number of media mediums, and more. 7 – 15 years ago (2000 – 2008), if you were to look up a product online called “merchant cash advance”, you would not have produced many search results. As a result, to inform and educate the merchant on the product, you needed an actual human being (a broker) to sit down and explain the nuances of said services referred to as “split funding”, “revenue purchases”, and “holdback percentages.”
Compare this to today, where a simple search for “merchant cash advances” gives you pages upon pages of articles, promotional ads that follow you across the internet, company websites, press releases, and more. The merchant can easily learn about the merchant cash advance as well as other new forms of alternative financing by going online and scrolling through the vast amount of information. They can educate themselves on the products, companies, and payback procedures. They can fill out a form and get 10 quotes from 10 companies within a couple of hours and in a lot of cases, receive funding from one of the companies by the next business day. The phenomenon is so big that companies in our space are now just referred to as “Online Lenders,” totally shunning the fact that many operate with traditional brick and mortar locations and still employ brokers to still resell the products like they did “in the old days”.
THE FUTURE
Based on my sole objective analysis, The Future is going to be all about the three networks of Strategic Partnerships, which includes The Online Network. Without a shadow of a doubt, those that control these networks will be the major players going forward, as they will have the leveraged resources, knowledge, experience, financing, and connections that the newer market entrants just do not have.
The 80/20 dynamic will continue, where 20% of the players produce 80% (or more) of the production, and the other 80% of the players will fight over the remaining 20% (or less) of the production, which just will not be enough to sustain profitability going forward.
As fast as these new entrants rush in, will be as fast as they burn out. Burning through their savings and retirement funds, and/or running up the utilization rate on their credit cards, trying to take advantage of a “market opportunity” that they “heard about”, but is pretty much already capitalized on, by those who have been here long before they came on the scene.
Lender Or Broker – Do You Know Your Partner?
December 15, 2015I probed the audience here on AltFinanceDaily a couple of times this year. Back in June 2015, I wanted to know if you knew what you were selling when it came to the merchant cash advance product? In October 2015, I wanted to know if you knew what you were buying when it came to leads versus data? So as we close out 2015 here in December, I wanted to probe the audience of AltFinanceDaily once more, this time asking: do you know your partner?
THERE’S NO SLOW DOWN COMING (THE NEW ENTRANTS WILL CONTINUE TO RUSH IN)
I’ve been asked by individuals within the industry and those outside of it, on my opinion of when the mass rush of new entrants into the market will slow down. In my opinion, the Year of the Broker will not stop in 2015, but will continue into 2016 and most likely into 2017, when the chickens finally come home to roost for the new entrants, who mostly lack the leveraged networks needed to survive and thrive, and instead are relying on one or more of the following strategies which will no longer be efficient going forward:
- UCCs
- Aged Leads
- Random SIC listing calls
- Random Yellow page calls
- Parking your car down the street and randomly walking into merchant shops
- Stacking behind a 2nd position
Those who are leveraged with quality strategic partnerships, networks and access to exclusive data records, will be the ones that control the market going forward, while others will fail to remain profitable in this ever changing, integrating and evolving marketplace that we all fight tooth and nail in.
But I must ask you if you know your Partner, as this mass new entrance of players have created many documented cases of brokers having deals stolen, back-doored, commissions not paid, renewal commissions cut-off, and other unscrupulous acts. The vast majority of these documented cases are coming from broker-to-broker relationships, with one broker submitting a file to another broker, but being totally unaware of the fact that they are not working with a “direct” funder or lender.
As we go forward through our changing marketplace, where profits will get tighter, strategic partnerships will be your driving competitive advantage and where access to merchants in general from a “cold-calling” perspective will get more restrictive, you just can no longer afford to be the victim of an unscrupulous act and lose commissions. As a result, going forward, you must indeed know your partner.
THE SEVEN
The following are the seven ways that one could participate in our space:
The Referral: They are not involved in the actual sales process at all, which includes selling rates, collecting paperwork, signatures, etc. All they do is refer a person’s name, telephone number and email address, and might collect an upfront referral fee for doing so. These are usually members of a strategic partnership such as a bank, credit union, credit card processor, accounting firm, insurance firm, etc.
The Sub-Broker: They work as a broker-to-a-broker, going out and doing all of the activity involved with the sales process and submitting the package to a broker, who will then submit it to a couple of funders to “close” the deal. They would then be paid a portion of the commission that the broker gets from the funder or lender once the deal funds, so if the broker gets 6 points, the sub-broker might get 2 or 3 points. Sometimes these individuals (sub-brokers) are willingly signing up for this arrangement, and sometimes they are unwillingly signing up by believing the broker is an actual direct funder or lender, when they are not. This leads to a majority of the issues I’ve identified such as having deals stolen, deals back-doored, commissions not paid, renewal commissions cut-off, and other unscrupulous acts.
The Broker: They go out and do all of the activity involved with the sales process and submit the package to a funder or lender, then manages certain aspects of the closing process such as getting additional signatures, questions answered, stips collected, etc. They would then be paid the commission they set on the deal by marking up the funder or lender’s buy-rate. So if the buy-rate is a 1.12 for a 6 month period, and they marked it up to 1.18, they would be paid 6 points on the deal.
The Syndicate: They would basically do everything a Broker would do, but for some deals they will put some of their own capital resources on the line through syndication, it might be their own equity sources or they might use debt sources such as those from credit card no interest promo deals. The syndication process just allows them to take more money home on the deal.
The Direct Funder/Lender: They have built their own underwriting platform and formulas to lend out either merchant cash advances and/or alternative business loans with a focus on a certain level of profitability and to maintain a certain default rate threshold.
The All-In-One: This is a firm that basically is structured as a direct funder/lender, but they also broker out some deals and on those deals that are brokered out, some of them include the firm syndicating to increase their take home revenue on the deal in particular.
The Investor: This is an equity or debt source that invests capital into a direct funder/lender’s underwriting platform and formula, seeking to capitalize on the high profits that result from a merchant successfully paying back either a merchant cash advance or an alternative business loan.
KNOW A DIRECT FUNDER/LENDER WHEN YOU SEE ONE
When I first started reselling the merchant cash advance and alternative business loan products in late 2009, I noticed that one of the ways to differentiate yourself in the market was to say that you were a “direct funder”, apparently the mentality was that merchants only wanted to talk to the people who could actually do the lending.
Well, I preferred to just admit upfront to merchants that I was a broker, but just explain that the industry is complicated in terms of the pricing models that are present. If you qualify for A+ Paper pricing, you want to make sure you are submitting your package to an A+ Paper lender, otherwise, you might be a merchant with a 700 FICO, clean banks, no liens, and other A+ Paper like qualifications, but might be submitting your package to a funder that will only spit out 6 month offers at 1.35 factor rates. So if you are seeking to work with a direct funder/lender (even if they also syndicate or broker on the side), you just have to know one when you see one, by using some of the following rules of thumb:
- Licensure: Look for some type of state licensure or registration. You can usually find this out by asking the firm their corporate legal name and research this in the state database of where they are incorporated or other states of where they do business.
- Track Record: Look for a proven track record, which means they should have funded at least $10 million in volume and have in business at least 12 – 24 months.
- Fully Staffed: Look for a full office staff, by the firm being very small, this is how your deals end up getting lost, stolen, or the underwriting process drags on for seemingly forever.
- Online Identity: Look for a professionally designed website with a business email address. In addition, look for some type of online press release about the shop opening, a media interview, or news release about an equity or debt financing round. Look up the principals on LinkedIn, and the company should come up on Google as well as other online directory listings including the Better Business Bureau. If you can’t find anything about the company or the principals online in some sort of professional listing and/or publicity based format, I would move on.
THE FINAL WORD
I don’t think there’s a worse feeling one can have, to have gone through the process of spending money to generate a qualified lead, to “close” that lead by getting them to send you an application package, and then to submit the package to your supposed “funder”, only to have the deal stolen and back-doored because your supposed “funder” was nothing but an unscrupulous broker the entire time.
Making sure you select good partners is vital to your survival on this battlefield called “alternative lending”, a battlefield that we fight, scratch, and claw on daily to feed ourselves, our families, and help make the lives of small business owners more efficient than before we got here.
Stop Being A Sub-Broker
December 10, 2015
In an industry with increasing competitive forces putting downward pressures on offer pricing, while simultaneously driving up demand for particular marketing channels (like SEO and quality data) which increases marketing costs, we are seeing massive downward pressures on profits. With this phenomenon occurring, you would have to wonder why in the world would anyone continually operate as a sub-broker today (willingly)? Are there any particular benefits to this, or is it just flat out non-sense? I wanted to explore this topic head on as we wrap up The Year Of The Broker.
THE VAST MAJORITY OF THE TIME, IT MAKES LITERALLY NO SENSE
There are times when I believe being a sub-broker makes some level of sense, but in my opinion those times (looking at our industry specifically) are very rare and most of the time being a sub-broker makes literally no sense based on the setup. The usual setup for a sub-broker is the same as a broker, which means you are going to be required to go out and spend money on marketing or other forms of lead generation to attract applicants.
Once you get those applications, you would forward them to the brokerage house so they can “close” the deal. A lot of sub-brokers believe this is some sort of grandiose deal, allowing them to as they say “free up time” to do other things. But this line of thinking makes literally no sense, because you have already done 98% of the work, which in our industry is just the consistent generation of high quality leads. Once you have done that and are doing that consistently, emailing the package over to a funder and chasing paperwork is the easiest part.
Why would you take only 25% – 50% of the commission structured on a deal, as well as most likely lose your ongoing renewal compensation, when you can instead take 100% of the commission, control your renewal portfolio and make renewal compensation going forward, which is the lifeblood of our industry?
LIES, LIES AND MORE LIES
Sub-brokers need to stop falling for the lies of larger brokerage houses which include the following:
“We are closers, you aren’t a closer, so let us handle it!”
This is rubbish. In our industry we don’t close, we are match-makers. The merchant comes to us looking for working capital, we pre-qualify their current standing and recommend a potential solution. If the merchant disagrees with the potential solution and we have nothing else that would work, the discussion ends. If the merchant agrees to the estimates and the product overview, we collect an application package to submit it to the funder that we believe can do an appropriately-priced deal. As long as we can get approval inline with expectations, everything moves forward on its own accord.
“We have access to special underwriting, platforms and pricing that you don’t have access to!”
More rubbish. When lenders get an A-paper deal, they give you A-paper quotes. When they get a B/C-paper deal, you get B/C-paper quotes. Look to establish a good relationship with a funder/lender. Let them know upfront that you are a small office so a smaller amount of volume will be coming through you. As long as you don’t have a high default rate, you will have access to the same systems, underwriters, base pricing, and innovative products of the funder/lender that the larger brokerage House has.
“We have access to special industry knowledge that you don’t have access to!”
More rubbish. With sources like AltFinanceDaily and other popular forums, the industry has been exposed. Everything you need to know, learn and be trained on has been covered. Also the assortment of direct funder and lender blogs/websites, media publications, and all of the like covering the industry, there’s no special industry knowledge that you can’t go out and attain on your own.
YOU MIGHT NOT EVEN GET PAID
Being a sub-broker might put you in a position of not even getting paid on new deal revenue as promised, as the large (or more experienced) brokerage is fully aware of your inability to truly challenge them legally or professionally.
- Sue If You Want, It Won’t Make A Difference: You can sue the broker for the $5,000 or so that they didn’t pay you on a couple new deals in Small Claims Court. But even though you can obtain a judgment, collecting on that judgment will be nearly impossible.
- Complain Online If You Want, It Won’t Make A Difference: You can also choose to damage their reputation online through posting various negative reviews, but do you think they will care? Go on the RipOffReport all you want, the largest merchant processing ISOs are all over those reports and that doesn’t do anything to stop their growth. The organizations getting these negative reviews will just say, “we serve thousands of clients and when you are as large as us, you are bound to have unhappy customers.” And that’s exactly what the brokerage house will say to their prospective merchants who bring up these negative review listings that you made.
BUT DOES BEING A SUB-BROKER “SOMETIMES” MAKE SENSE?
On very rare occasions do I believe being a sub-broker makes sense, and it includes if there’s some sort of initial training period and if the larger brokerage has significant marketing competitive advantages.
Training
So if you have zero experience, can’t spell Merchant Cash Advance, and believe you could benefit from a 6 month period with an established broker to show you the ropes, then being a sub-broker for a short period of time could make sense. However, I still believe that with the industry being exposed the way it is, you can train yourself and have to deal with insane non-compete agreements.
Marketing Competitive Advantages
So as a small shop, your marketing budget might be limited to $1k a month, whereas the larger brokerage is spending $20k a month and in a perfect world, might give you a deal where you can work with them without being required to generate your own leads.
They’ll claim to supply everything in terms of your dialer and warm leads, with funder networks already established. So all you have to do is come in, sit down, pick up the telephone, and sell all day to the warm leads coming in from their $20k in marketing. You don’t have to do any cold-calling. So you might be getting 50 leads a week that you convert to 12 applications, which you then convert to 4 new deals. If the average funding is $30k, then that’s $120k in funding with let’s say an average 6% commission that you would split 50/50 (3%/3%), giving you $3,600 per week which is $14,400 per month.
But we don’t live in a perfect world, now do we? Do you honestly believe the structure will be established as promoted? Such as more and more of the 50 leads you receive per week turn into mainly start-ups that don’t qualify for anything. Or, most weeks you don’t receive any warm leads at all, and are required to call UCCs, aged leads, or random listings out of the Yellow Pages, which are all horrible marketing mediums.
EITHER YOU GET IN ALL OF THE WAY, OR MAYBE YOU SHOULD GET OUT
If you are going to be in this industry, then properly set up your office, marketing plan, business plan, funder network and work your own deals. Get 100% of commission structured on new deals and control your renewal portfolio (the lifeblood of our business). If you are going to operate as a sub-broker, for the most part you are going to get a raw deal as we don’t live in a perfect world. We live in a world full of inefficiencies, “rah-rah” sales motivational speeches, and promises that don’t get kept.
Bad Merchants: Lies, Fraud, and Hard Times
December 4, 2015
Critics seldom tire of bashing alternative finance companies, but bad behavior by merchants on the other side of the funding equation goes largely unreported. Behind a veil of silence, devious funding applicants lie about their circumstances or falsify bank records to “qualify” for advances or loans they can’t or won’t repay. Meanwhile, imposters who don’t even own stores or restaurants apply for working capital and then disappear with the money.
“People advertise on craigslist to help you commit fraud,” declared Scott Williams, managing member at Florida-based Financial Advantage Group LLC, who helped start DataMerch LLC to track wayward funding applicants. “Fraud’s a booming business, and every year the numbers seem to increase.”
Deception’s naturally on the rise as the industry continues to grow, according to funders, industry attorneys and collections experts. But it’s also increasing because technology has made it easy for unscrupulous funding applicants to make themselves appear worthy of funding by doctoring or forging bank statements, observers agreed.
Some fraud-minded merchants buy “novelty” bank statements online for as little as $5 and fill them out electronically, said David Goldin, president and CEO of Capify, a New York-based funder formerly called AmeriMerchant, and president of the SBFA, which in the past was called the North American Merchant Advance Association.
To make matters worse, dishonest brokers sometimes coach merchants on how to create the forgeries or modify legitimate records, Goldin maintained. Funders have gone so far as to hire private investigators to scrutinize brokers, he said.
But savvy funders can avoid bogus bank statements, according to Nicholas Giuliano, a partner at Giuliano, McDonnell & Perrone, a New York law firm that handles collections. Funders can protect themselves by remaining skeptical of bank records supplied by applicants. “If the merchant cash advance company is not getting them directly from the source, they can be fooled,” Giuliano said of obtaining the documents from banks.
Another attorney at the firm, Christopher Murray, noted that many funders insist upon getting the merchant’s user name and password to log on to bank accounts to check for risk. That way, they can see for themselves what’s happening with the merchant.
Besides banking records, funders should beware of other types of false information the can prove difficult to ferret out and even more difficult to prove, Murray said. For example, a merchant who’s nine or ten months behind in the rent could convince a landlord to lie about the situation, he noted. The landlord might be willing to go along with the scam in the hope of recouping some of the back rent from a merchant newly flush with cash.
Merchants can also reduce their payments on cash advances by providing customers with incentives to pay with cash instead of cards or by routing transactions through point of sale terminals that aren’t integrated onto the platform that splits the revenue, said Jamie Polon, a partner at the Great Neck, N.Y.-based law firm of Mavrides, Moyal, Packman & Sadkin, LLP and manager of its Creditors’ Rights Group. A site inspection can sometimes detect the extra terminals used to reduce the funder’s share of revenue, he suggested.
In a ruse they call “the evil twin” around the law offices of Giuliano, McDonnell & Perrone, merchants simply deny applying for the funding or receiving it, Giuliano said. “Suddenly, the transaction goes bad, and they deny they had anything to do with it,” he said. “It was someone who stole the merchant’s identity somehow and then falsified records.”
In other cases, merchants direct their banks not to continue paying an obligation to a funder, or they change to a different bank that’s not aware of the loan or advance, according to Murray. They can also switch to a transaction processor that’s not aware of the revenue split with the funder. Such behavior earns the sobriquet “predatory merchant,” and they’re a real problem for the industry, he said.
Occasionally, merchants decide to stop paying off their loans or advances on the advice of a credit consulting company that markets itself as capable of consolidating debt and lowering payments, Giuliano said. “That’s a growing issue,” agreed Murray. “A lot of these guys are coming from the consumer side of the industry.”
The debt consolidator may even bully creditors to settle for substantially less than the merchant has agreed to pay, Murray continued. Remember that in most cases the merchants hiring those companies to negotiate tend to be in less financial trouble than merchants that file for bankruptcy protection, he advised.
“More often than not, they simply don’t want to pay,” he said of some of the merchants coached by “the credit consultants.” They pay themselves a hundred thousand a year, and everyone else be damned. You continue to see them drive Humvees.”
Merchants sometimes take out a cash advance and immediately use the money to hire a bankruptcy attorney, who tries to lower the amount paid back, Murray continued. However, such cases are becoming rare because bankruptcy judges have almost no tolerance for the practice and because underwriting continues to improve, he noted.
Still, it’s not unheard of for a merchant to sell a business and then apply for working capital, Murray said. In such cases, funders who perform an online search find the applicant’s name still associated with the enterprise he or she formerly owned. Moreover, no one may have filed papers indicating the sale of the business. “That’s a bit more common than one would like,” he said.
In other cases the applicant didn’t even own a business in the first place. “They’re not just fudging numbers – they’re fudging contact information,” said Polon. “It’s a pure bait and switch. There wasn’t even a company. It’s a scheme and it’s stealing money.”
Whatever transgressions the merchants or pseudo-merchants commit, they seldom come up on criminal charges. “It is extremely, extremely rare that you will find a law enforcement agency that cares that a merchant cash advance company or alternative lender has been defrauded,” Murray said. It happens only if a merchant cheats a number of funders and clients, he asserted. “Recently, a guy made it his business to collect fraudulent auto loans,” he continued. “That’s a guy who is doing some time.”
However, funders can take miscreants to court in civil actions. “We’re generally successful in obtaining judgments,” said Giuliano. “Then my question is ‘how do you enforce it?’ You have to find the assets.” About 80 percent of merchants fail to appear in court, Murray added. Funders may have to deal with two sets of attorneys – one to litigate the case and another to enforce the judgment. Even merchants who aren’t appearing in court to meet the charges usually find the wherewithal to hire counsel, he said.
Funders sometimes recover the full amount through litigation but sometimes accept a partial settlement. “Compromise is not uncommon,” noted Giuliano. Settling for less makes more sense when the merchant is struggling financially but hasn’t been malicious, said Murray.
To avoid court, attorneys try to persuade merchants to pay up, said Polon. “My job is to get people on the phone and try to facilitate a resolution,” he said of his work in “pre-litigation efforts,” which also included demand letters advising debtors an attorney was handling the case.
But it’s even better not to become involved with fraudsters in the first place. That’s why more than 400 funding companies are using commercially available software that detects and reduces incidence of falsified bank records, said a representative of Microbilt, a 37-year-old Kennesaw, Ga.-based consumer reporting agency that has supplied a fraud-detection product for nearly four years.
“Our system logs into their bank account and draws down the various data points, and we run them through 175 algorithms,” he said. “It’s really a tool to automate the process of transferring information from the bank to the lender,” he explained.
The tools note gross income, customer expenditures, loans outstanding, checks returned for non-sufficient funds and other factors. Funders use the portions of the data that apply to their risk models, noted Sean M. Albert, MicroBilt’s senior vice president and chief marketing officer.
Funders pay 25 cents to $1.25 each time they use MicroBilt’s service, with the rate based on how often they use it, Albert said. “They only pay for hits,” he said, noting that they don’t charge if information’s not available. Funders can integrate with the MicroBilt server or use the service online. The company checks to make sure that potential customers actually work in the alternative funding business.
MicroBilt is testing a product that gathers information from a merchant’s credit card processing statement to analyze ability to repay excessive chargebacks reflected in the statements could spell trouble, and seasonality in receipts should show up, he noted.
Additional help in avoiding problem merchants comes from the Small Business Finance Association, which maintains a list of more than 10,000 badly behaving funding applicants, said the SBFA’s David Goldin. The nearly 20 companies that belong to the trade group supply the names.
SBFA members, who pay $3,000 monthly to belong, have access to the list. According to Goldin, the dues make sense because preventing a single case of fraud can offset them for some time, he maintained. Besides, associations in other industries charge as much as $10,000 a month, he added.
Another database of possibly dubious merchants, maintained by DataMerch LLC, became available to funders in July, according to Scott Williams, who started the enterprise with Cody Burgess. It became integrated with the AltFinanceDaily news feed by early October, causing the number of participating funders to double to a total of about 40, he said. The service is free now, but will carry a fee in the future.
It’s not a blacklist of merchants that should never receive funding again, Williams emphasized. Businesses can return to solvency when circumstances can change, he noted. That’s why it’s wise to regard the database as an underwriting tool. In addition, merchants can in some cases add their side of the story to the listings.
Funding companies directly affected by wayward merchants can contribute names to the list, Williams said. About 2,500 merchants made the list within a few months of its inception, he noted. “We’re super happy with our numbers,” he said of the database’s growth.
Many merchants find themselves in the database because of hard times. Of those who land on the list because of fraud, perhaps 75 percent actually own businesses and about 25 percent are con artists applying for funding for shell companies, Williams said.
So far, only direct funders – not brokers or ISOs – can get access to the database, he continued, noting that DataMerch could rethink the restriction in the future. “We don’t want hearsay from a broker who might not know the full scope of the story,” he said.
DataMerch might grant brokers and ISOs the right to read the list to avoid wasting time pitching deals to substandard merchants, but the company does not intend to enable members of those groups to add merchants to the database, Williams said.
Williams sees a need for the new database because smaller companies can’t afford belonging to the SBFA. The association also tracks deals about to become final, which could prevent double-funding but makes some users uncomfortable because they don’t want to disclose their good merchants, Williams said.
Although dishonesty’s sometimes a factor, merchants often go into default just because of lean times, Jamie Polon, the attorney, cautioned. A restaurant could close, for example, because of construction or an equipment breakdown. “Were they not serving dinner anymore, or was there something much deeper going on?” he said. Fraud may play a role in 10 percent to 20 percent of the collections cases his law firm sees, he noted. More than 95 percent blame their troubles on a downturn in business, and the rest claim they didn’t understand the contract, he said.
To understand the downturn, it’s important to amass as much information about the merchant as possible, said Mark LeFevre, president and CEO of Kearns, Brinen & Monaghan, a Dover, Del.-based collections agency that works with funders. That information sheds light on a merchant’s ability to repay and could help determine what terms the merchant can meet, he said.
Timeliness matters because the sooner a creditor takes action to collect, the greater the chance of recouping all or most of the obligation, LeFevre maintained. When distress signals arise – such as closing an ACH account or a spate of unreturned phone calls – it’s time to place the merchant with a collections expert, he advised.
LeFevre’s company also traces a troubled merchant’s dwindling assets to help the funder receive a fair share. Funders can sometimes recover all or most of what they pay a collection agency by imposing fees on the merchant, he noted.
Pinning the collection fees to merchants in default makes sense because that’s where the guilt often resides, observers said. It’s part of balancing the bad behavior equation, they agreed.
Merchant Cash Advance | A Look Back and Plan Forward
November 29, 2015
Merchant Cash Advance is still a relatively unknown term and product to the masses, but amongst most of its target customer base, it definitely has a stigma that is rightly deserved in some ways, but I believe that it is also misunderstood in many other ways. Having been in the industry for nearly 10 years, I can say that I have seen my fair share of positive and negative events as they relate to the industry, but I believe that it has all been for its betterment and growth. Furthermore, by having been on the underwriting side for a majority of that time, I can say with great certainty that I have seen this product help several small business owners over the years, and it will continue to do so as the stigma fades away and acceptance increases.
For those of us working in this industry now, let’s face it – most small business owners that have taken a merchant cash advance or have been solicited for the product would much rather go to their bank for the money. The problem, as many merchants have come to realize in recent years, is that lending in general essentially dried up after the recession. The faucet is now running again, but small businesses were all but forgotten. Only the most well qualified borrowers are able to obtain the desired amount of capital needed at a reasonable cost through traditional bank loans. In addition to meeting all of the necessary criteria for a bank loan or line of credit, a borrower must also be prepared to wait months for the process to be finalized.
The days of a small business owner being able to go down to his or her community bank or local branch for a quick cash injection are long gone, but that’s where we come in. We are catering to a customer base that has been left out to dry. We are dealing in a marketplace that is grossly underserved by the larger financial institutions. We are charging a premium for taking on risk that most cannot stomach. We are keeping America running. That might sound ambitious, but is realistic when you put things in perspective.
SBA and IDC data show that small businesses employ at least half of the US workforce and produce anywhere from 60% – 80% of the new jobs annually while also accounting for nearly half of total US private payroll. As if that weren’t enough, small businesses also produce six trillion dollars or over 50% of all non-farm GDP in the US. When looking at additional SBA data which also states that more than 80% of all small businesses need to use some sort of financing to grow their business, it’s perplexing as to why banks have turned their backs on the people that have put America on their very own backs.
However, I do not want to go into great detail or make any assumptions on why “big banks” are not lending to small businesses. Rather, I would like to take some time to focus on how we can continue to support the growth of small businesses across America. The MCA product in particular has evolved quite a bit over the past 10 years, but a lot of that development has taken place in the past 3-5 years, and the industry has grown leaps and bounds as a result. When I started working as an underwriter several years ago, there were less than 10 lenders and 50 brokers operating within the space. Nowadays, there are hundreds on both sides of the fence, and there are multiple new entrants every day – senior guys starting their own operations, one man rogues from the insurance and mortgage businesses, consumer payday lenders, et cetera. – all looking for our piece of the pie, but who out there is really looking to improve upon and grow the product for the better?
I suppose therein lies the problem. Unfortunately, the tremendous growth we have recently witnessed also comes with a flood of unqualified and unknowledgeable management and staff that are simply following the direction of their unqualified and unknowledgeable employers. As an industry, if we expect to continue making headway in the small business lending environment, we must first better ourselves by taking the time to learn and understand the product in order to better educate our customers. If you know me, you have heard me say on a few occasions that it is easy to put the money on the streets, but the problem for most people is getting it back.
As with anything in life, you cannot jump into something and expect to master it. Over time, you get a grip of what you are doing, and you begin to build on that understanding. Therefore, no one should enter the market expecting to make huge returns without learning the ins and outs of the business. I, along with several of my peers, have seen plenty of well-intentioned but aggressive entrants “lose their shirts,” so to speak, because they did not do the proper diligence on the industry or the actual diligence required to operate within the space. Lending money with only a UCC-1 in place only on future receivables or sometimes no collateral at all is risky business as it is, but not taking the necessary steps to mitigate that risk is only asking for a rough road ahead – not only for the lender itself, but also for their potential clients, brokers, other lenders, and the industry as a whole.
Our underwriters and sales people, in addition to management, should have a solid understanding of the product they are working on. They should be able to educate customers as well as their peers. Transparency throughout the process is key for maintaining a long and mutually benefiting relationship with the client. By having this firm grip and understanding of the product, we reduce the risk of an unsatisfied customer. As with the mortgage and insurance industries, sales and underwriting must work together to determine the best possible result for both the client and the company. This is definitely a challenge for most groups due to the amount of balancing required to meet the needs of the company, but by establishing best practices and procedures in both the sales and underwriting processes, we can begin to think and work within separate verticals and group goals but streamline the process to achieve the agenda of alternative small business lending which should be to help provide small business owners with the fast and efficient capital they need.
Whether you have been in the industry for years, you have just joined this year, or you are considering taking the dive now, it’s only fitting that at this time of year we give thanks to those small business owners and celebrate their entrepreneurial spirits because they are the reason we, ourselves, are currently employed. But more importantly, they are setting us up for quite an adventure which will change the landscape of small business lending for good. I, personally, cannot wait for the next 3-5 years of continued growth because I can only see a bright future if we are able to collectively educate ourselves and pass that knowledge along to our clients. As long as the proper steps to learn have been taken, the competition from new entrants mentioned previously is also welcomed because this further drives new ideas and developments within the space – new financial products to offer clients, lower costs, and most importantly easier and efficient access to quick capital for the busy small business owners constantly on the go in an effort to grow their business while putting the rest of us on their backs.
