Why Marketplace Lending Euphoria Has Really Ended – It Was Lust not Love
April 13, 2016
“The honeymoon is over,” said Peter Renton at Lendit. He was speaking in reference to the media’s shifting coverage of marketplace lending. Some professionals throughout the conference said the excitement had faded because venture capitalists had already gotten their fill or that there was economic uncertainty or that assets could potentially underperform.
Fitch for example, attributes the euphoria-ending reality check to a lack of available data to support sustainability throughout credit cycles, in addition to regulatory interest.
Those theories aren’t wrong, there’s just not much new about them. These same concerns were raised at length two years ago.
Here’s why the euphoria has really ended:
The unknowns are now known
Two years ago, investors wanted to know who you were, what you did, and how you did it. They wanted to know if it was legal, what you valued yourself at, and how big you thought the market was for that product or service. To investors, these fintech startups were both mysterious and seductive. They were changing the world, uberizing lending, disrupting banking, and showing huge potential for scale. One might say, it was euphoria-inducing.
Calling what happened next a honeymoon implies that there was a marriage. Instead, investors became lust-fueled suitors chasing after The It Girl, confusing their infatuation for real romantic feelings. But like all relationships that start out this way, the investors freaked when their marketplace lender partners admitted they were looking for something long term.
Baby, you know I like you but we haven’t even been through a full credit cycle yet
Marketplace lenders started to talk about marriage, a honeymoon, kids, and heck even moving out to the suburbs to launch a brick and mortar location to complement their online businesses. Maybe they’d even one day accept deposits and become banks themselves.
It’s the kind of talk that can cause an investor to rethink everything.
OMG, are these companies all just banks? Should we be valuing them as banks?!
Suddenly they’re starting to look at their partners in a whole new light. Those once cute flaws are now annoying quirks. And so it’s time to decide if they’re really the one or just another relationship that was fun while it lasted.
Dating the same people
Lending Club’s CEO Renaud Laplanche has been a keynote speaker at Lendit for four years in a row. His company originates more than $8 billion a year in loans. What they do, how they do it, and how much it’s worth, is all disclosed in their quarterly earnings reports.
There’s Lending Club’s competitors, OnDeck, OnDeck’s competitors, SoFi, SoFi’s competitors and so on. Every little sector of marketplace lending has a benchmark. It might be bond ratings, annual origination volume, securitization appetite, public valuation, default statistics, investor base or something else. So even if an investor doesn’t know YOU, they probably know a lot about someone like you. This puts them in a position of power and thus the opportunity to play hard to get.
They still like marketplace lenders, that much was obvious by Lendit’s record attendance this year. They just might be entering a point in their lives where they want a partner they can actually take home to meet their mothers.
If that sounds serious, it’s because it is. Could there be wedding bells in the industry’s future? The real honeymoon has yet to come.
Will Marketplace Lending Revert Back to Peer-to-Peer Lending?
March 28, 2016
Institutional investors wanted higher yields on Prosper’s latest bond offering, an entire five percentage points higher, according to the WSJ. This wasn’t necessarily brought on by performance either. Instead the once voracious appetite for all things online lending is being tempered by uncertainty.
Bain Capital Ventures partner Matt Harris told the WSJ that online lenders will need to replace the easy hedge fund money by “longer-term capital.” Normally, that would include traditional bank lines and credit facilities, but moving that direction could irreversibly sever the ties with their peer-to-peer roots and image.
Peer-to-peer (p2p) lenders embraced Wall Street’s easy money to scale, rationalizing to the peers on which they were founded that this was all necessary to change the status quo. The road to the sharing economy utopia required hobnobbing with the very institutions they were set on disrupting, they said. The P2p term wasn’t compatible with this narrative so it was replaced with “marketplace lending,” which helped it retain its Silicon Valley feel and gave it the range to argue that hedge funds and peers were virtually the same thing since they were both buyers in a new-age marketplace.
But early this year, something started to happen. Loan originators like SoFi (which was never peer-to-peer) could not sell loans fast enough. One solution they came up with was to launch their own hedge fund to buy their own loans. SoFi CEO Mike Cagney said, “In normal environments, we wouldn’t have brought a deal into the market, but we have to lend. This is the problem with our space.”
But blaming financial institutions for pulling back credit is a scenario that has played out thousands of times in history. One only need watch The Big Short to connect why it’s dangerous for a lender to depend on the institutional credit markets. That’s where the peer-to-peer model was supposed to come in, a new way for a new day without Wall Street to prevent these problems.
But it’s not too late to go back. Lending Club for example, has capped their wholesale channel (the institutional portion) at 50%. They’ve kept more than 100,000 retail investors and intend to grow that even larger. “We’ve always been more exposed to retail, and I think we want to keep it that way,” said Lending Club CEO Renaud Laplanche to the Financial Times. “We’ll probably see that as a competitive advantage, as a source of stability and predictability, particularly in an economic downturn,” he added.
Prosper meanwhile has depended almost entirely on the institutional channel, an astounding 92% of their loans were sold to that category of investors. It’s a far cry from the slogan that appeared on their website back in 2007. “People-to-people lending. It’s an old idea that’s new again,” it said. Today it says, “We connect people looking to borrow money with investors.” Those investors are predominantly Wall Street.
But what to do when Wall Street will one day no longer be interested? It’s not too late to go back in time.
“Borrow money from people just like you,” said Prosper’s website nine years ago. People just like you might not suddenly decide they want five percentage points more. Peer-to-Peer implied a human aspect to the marketplace, that empathy played a role in a world where Wall Street had always been stone cold.
Will the industry revert back to the people? Or will ideas such as starting your own hedge fund to buy your own loans rule the day?
“Me, Too” Lenders Something to Worry About, Says Former OnDeck Investor
March 11, 2016
Lending Club, SoFi and OnDeck will endure, wrote Matt Harris, a former OnDeck board member and investor, and current Managing Director for Bain Capital Ventures. In a blog post that approached 4,000 words, Harris admits that he has not invested in a single lender since OnDeck.
“It is still possible, though I believe increasingly unlikely, that marketplace lending will be a durable innovation,” he wrote. He bases that on the assumption that origination platforms with no skin in the game are not sustainable over the long term and that what really made companies like Lending Club special is that it has “scale, a brand in the capital markets for producing high quality assets, and an unbelievable management team.”
All of the other perceived advantages don’t make sense, he argues. The average cost of funds for a bank “is 0.06%, assuming they fund their loans using deposits. OnDeck’s funding costs for its assets averages 5.3%. Lending Club has paid a median return to its asset purchasers of 7.4%.” Banks have lower operating costs as well. “I’ll point out that most of the bank expenses they highlight are fixed expenses like branches and compliance, which makes that expense burden irrelevant to the profitability of the marginal loan,” he wrote.
Even on technology, Harris says banks spend less, and on big data credit scoring, he says a lot of the factors marketplace lenders might find useful in predicting performance cannot be used legally because they end up correlating with a protected class such as race, whether it’s directly or indirectly.
“Things are going to get harder before they get easier,” Harris wrote, though he thinks companies like OnDeck and Lending Club are positioned to last. Everyone else who copied their model is in shaky territory. And yet through it all, he is optimistic. “For the first time in a decade, I’m feeling like it’s a great time to be starting a lending company,” he said.
Is OnDeck Back On Deck? – Industry Veterans Weigh In
March 8, 2016
After an unpleasant seesaw ride, Ondeck’s stock bounced back to its pre-earnings levels hovering around $8. The lender’s stock crashed 20 percent following its financial earnings on February 22nd due to a soft forward guidance.
The online lender funded a record $557 million in loans in Q4 2015 and generated $68 million in revenue but it wasn’t enough to make up for the $4.6 million in loss. As AltFinanceDaily commented earlier, the markets can be unforgiving and irrational in its speculation of a downturn. And while OnDeck prides itself for being a company built for downturns because of its short-term repayment cycle, its stock has slumped over 65 percent since its December 2014 debut.
AltFinanceDaily spoke to experts to ask how reflective this was of the industry and if this portends a larger economic gloom. Here’s what they had to say:
Downturn Survival? Not So Sure
David Obstfeld and Eric Cavalli of merchant cash advance provider S.O.S Capital, think that the market reaction to OnDeck is too strong, even unwarranted. “This is a fairly new industry and many don’t understand it yet,” said Cavalli. “Everybody is expecting an economic downturn and since this is an unproven business, one cannot really comment on whether MCA and the small business lending industry will actually survive.”
While OnDeck’s big data-led algorithmic lending has brought about a major shift in the industry, Obstfeld and Cavalli suspected that it might be why the company lost touch with the ISO base they relied on when it started.
OnDeck, Not On Deck
Heather Francis of Elevate Funding does not consider OnDeck a part of the alternative finance industry given its business model and its fintech brand identity. “OnDeck has a brand issue, they want to be a software company on one hand and an alternative bank on the other,” Francis said. “The marketplace does not know what to do with them and no one sees what OnDeck sees in the mirror.”
Francis also commented that the hype around algorithmic lending is driven less by success and more for investor appeal in fintech. “OnDeck and Lending Club have a lot of capital behind them but there will be a lot of segregation between these companies and the traditional alternative finance companies. OnDeck cannot handle any kind of downturn.”
Just Process, Not Alarm
Corey Cicero at Platinum Rapid Funding considered the market reaction to be harsh and said that this is a normal trajectory for any company. “They are a market leader as far as brand names go. They have a lot to validate their leadership and they are on everybody’s bank statement who has a merchant cash advance,” Cicero said. “I don’t think the stock will be affected further. Congress is figuring out what to do with the industry, everyone else is figuring it out. This is a process.”
Industry Trends
Obstfeld at S.O.S Capital expects a major shakeout in the lending industry. “The market is saturated and in the next six months, the reputable companies will slash rates and when rates cannot be lowered further, companies will get creative with products and pricing.”
And Francis thinks that shakeout could come in the form of consolidation. “The market will shrink and people will spend more to get more origination and the most eye-catching product appealing to millennial entrepreneurs will take off.”
Meanwhile, Cicero at Platinum Rapid Funding said he thinks that there will be a purge of people writing bad loans. “This industry has a low barrier to entry leading to too much competition. People who write bad loans will be weeded out and the industry will correct itself.”
‘Year of the Broker’ Gives Way to ‘Year of the Reduced Commission’
February 21, 2016
Many brokers just starting out in the alternative funding space may be in for a rude awakening. It’s not that the ‘Year of the Broker’ is over, per se, but 2016 certainly represents a new chapter for newbies—one in which getting rich quick and succeeding over the long-haul will be much more difficult.
“It’s the ‘Year of the Leader’ now. Fresh brokers coming into our space will have to work harder to set themselves apart, and it will be harder for many of them to make the money they once did,” says Amanda Kingsley, chief executive of Sendto, a Palm Bay, Florida-based firm that assists companies in the alternative finance industry with referral marketing and operational growth programs.
Funders today remain hungry for deals and are still paying relatively high rates to bring in new business. Yet there are several competitive realities putting a damper on a new broker’s earnings power.
“A few years ago, individual brokers could be making $20,000 or even $40,000 a month. Now those numbers are much more difficult to reach unless brokers have a unique lead generation method or their own money to participate in the deals,” says Zachary Ramirez, a vice president and branch manager in the Orange, California office of World Business Lenders, a New York-based lender.
Most funders today allow brokers to charge merchants between 8 and 12 points above the buy rate, with some allowing as high as 15 to 20 points, according to industry participants. But to win business amid a flurry of competition, brokers are being forced to take a lower cut on many deals. Not only are there more brokers to compete with, but merchants are also savvier—and more price-conscious—about alternative funding products than they were several years ago.
For higher quality deals, there’s another force at play driving down what sales reps can earn. That’s because a handful of large funders are instituting caps on what brokers can charge top-quality merchants. “They want to make sure that the price that’s charged to the merchant is fair,” says Stephen Sheinbaum, founder of Bizfi, a New York-based funder that has not instituted these caps.
Together, these competitive realities mean that sales reps, on average, are making much less than they did a few years ago. For example, on high quality deals, brokers might only be able to make 3 to 8 points per deal on average. For lower quality deals, on the other hand, brokers might make as much as 15 to 20 points.
So far, the changing economic tide hasn’t discouraged new sales reps from jumping in. In fact, the market is still hot for new brokers who continue to pour into the market at a torrid pace, buoyed by rampant media attention and aggressive advertising by funders and large brokerage houses. “I think it’s even worse now,” says John Tucker, a solo broker since 2009 who also blogs for DeBanked. “They’re signing up anybody with a heartbeat and a pulse.”
Clinging to Misperceptions
Despite the overcrowding issue, industry watchers expect new brokers will continue to flood in as alternative funding continues to gain traction. Many of these new brokers, however, won’t be around very long. That’s because many of them are coming into the space, especially from other sales-oriented jobs, thinking it’s easier than it is. “I think many people are going to come into the space, fail and leave bloodied and bruised,” says Ramirez of World Business Lenders.
Indeed, there are many new brokers who are still holding on to outdated notions about the business. Some are primed to think that they can easily make 10 points on a $100,000 deal and if they do that once a month, they have the potential to make $120,000 a year. “It’s just not as easy as it’s promoted to be,” says Tucker, who owns 1st Capital Loans in Troy, Michigan. Even Tucker, a seasoned broker, frequently has trouble connecting with merchants nowadays because they are inundated with sales pitches. They’ll hang up on him as soon as he makes it clear he’s a broker because they are getting so many calls from competitors, he says.
William Ramos, owner of Right Away Funding in Phoenix, Arizona, recently worked with a new broker who was convinced he was going to make $5,000 a week from the get-go. Ramos tried to manage his expectations by explaining he’d first have to learn the business and be persistent if he hoped to make that kind of money.
Ramos says the broker took his advice by asking lots of questions and working hard over the next six months. He’s not making what he had originally hoped, but he is up to about $5,000 a month, says Ramos, the former president of Staten Island, New York-based Supreme Capital Group, which he sold in 2015 to open a new firm.
In talking to new brokers, Nathan Abadi president of Excel Capital Management in New York, a lender and MCA funder, also sees a lot of misconceptions about what they think they can make and how easy it will be. It becomes problematic when the reality doesn’t match up with their expectations. For instance, he recently hired a used car salesman who worked for his company for about two months before they parted ways. The broker thought that because he had sold so many cars in the past, he could easily apply that to alternative funding. But he didn’t want to take the time to thoroughly learn about the new product set. He was just trying to ink deals based on cost, which is no longer a viable strategy, Abadi explains. “Customers know what the rates are. They’re not just applying with one person,” Abadi says.
The first month, the new broker closed a $175,000 deal based on a lead he was given and with Abadi doing the bulk of the legwork. After that, the broker got a few more deals, but he couldn’t do it on his own without significant support from the firm. A big problem was that he didn’t understand the math behind the deals he was pitching. “If merchants ask you a question and you can’t answer it properly, you’re done. The deal’s over. Not enough people are taking the time to understand the market as a whole,” says Abadi, whose firm is in the process of hiring new brokers for its internal sales force.
Edward Siegel, founder and chief executive of Fundzio LLC, a funding company in Fort Lauderdale, Florida, says he still sees plenty of new brokers who come into the business believing they can easily close a deal for $50,000, make 10 points and sustain that type of income. “The market has changed. The cost of capital has gotten a lot lower for the customer, and since there are more brokers in the marketplace they are willing to take a lesser amount just to get the deal to the finish line,” he says.
A lot of brokers come into the industry all gung ho and then flounder when they see how hard it really is. Siegel says he’s seen them submit deals for a few months and then realize they were living a pipe dream and leave the industry. “It’s not easy, especially in a competitive marketplace, especially when 10 other brokers might be knocking on that same guy’s door,” he says.
Nearing the breaking point
Andrew Reiser, chairman and chief executive of Strategic Funding Source, a New York-based funder, says that many brokers are operating under a false sense of security. “We’re in a strong economy in our space largely because of lack of other available sources of capital from larger institutions. When a market is very forgiving, mistakes are easily absorbed and swept under the carpet.”
He believes it’s going to get even harder for brokers over time, likening the situation with brokers today to that of stockbrokers a few decades ago. People used to be inundated with calls from stockbrokers at firms of all sizes about this stock or that one. Now many small brokerage houses have disappeared and larger firms have moved away from cold calling. Instead they are focused on money management and proving their prowess as specialists.
“You can’t be all things to all people serving a market this size,” he says.
Survival Strategies
Kingsley of Sendto says she receives many questions from new brokers about how to compete effectively, and it’s not an easy answer. Having a niche product, though, can help. “If you can learn how a particular industry works along with appropriate deal placement, you can develop a really good client base. It helps when presenting your clients to funding companies and you will build a more professional relationship,” she says.
Tucker, the broker with 1st Capital Loans, notes that UCCs and Aged Leads are outdated marketing tactics and says most new brokers don’t have enough industry knowledge to critically think to create new strategies for survival. “All they will end up doing is burning through the little capital that they do have and be out of the business within 12 to 18 months,” he says.
Having good training is critical for new brokers to survive, according to Mike Andriello, president of Cushion Capital Corporation in Poughkeepsie, New York. “I think that if brokers focus on the nature of the industry, actually pick the business owners’ minds and learn their business as best as they can, they will have a lot of success. It’s not all about making the biggest commissions; it’s about having the biggest client book,” he says.
Ramirez of World Business Lenders believes brokers can do better for themselves long-term by syndicating because it’s a way to make more money. “I don’t think it’s a long-term strategy if a broker’s not participating in his own deals,” he says.
Granted, some funders make it easier for brokers to participate than others do, but Ramirez believes brokers should seize opportunities to earn interest income over the life of the loan. So, for instance, on a $100,000 loan, instead of earning a $20,000 commission upfront, a broker might be able to apply that money to the deal and earn $26,000 or $28,000 over the life of the loan.
Of course, this strategy won’t work well for brokers living paycheck to paycheck. “But if you don’t need the commissions right away, you can roll the commissions into deals and increase your earnings exponentially,” he says. “Because of rising acquisition costs and decreased commission averages per deal, being forced to participate, or syndicate, is the natural evolution.”
Gearing for the Future
To be sure, industry watchers believe there is still ample opportunity for new brokers with drive and ambition to enter the space. “Successful brokers will always have a place in the ecosystem,” says Sheinbaum of Bizfi.
But there’s a general consensus that from now on these brokers will have to work harder than they have in the past to thrive. Says Andriello of Cushion Capital: “2016 will be the year of who was smart enough and made the right business moves to stay progressing and growing. It will also be the year a lot of funders and brokerage firms close shop.”
Over time, the changing economic reality will continue to set in. While it will be harder for individual brokers, it’s best for the industry when new sales reps understand the realities of the market and how to compete effectively. “You want the smartest people in the space. The more well-educated they are about the products and the processes, the better off everyone is,” Sheinbaum says.
Despite everything, it’s still a great time to be getting into the industry, provided you have the right mindset and proper resources behind you, according to Ramos of Right Away Funding. “If you’re just coming in and you just want to collect your weekly check, now’s not a good time to be a broker. It’s a great time for people who are hungry, motivated and determined to make something out of it.”
Industry Trade Group Coming of Age: The SBFA is Becoming More Political
February 1, 2016By hiring an executive director, the Small Business Finance Association hopes to achieve at least two goals – taking a step toward becoming a full-service trade group and providing a public voice for the alternative finance industry.
Stephen Denis, formerly deputy staff director of the U.S. House Committee on Small Business, went to work in the new role in mid-December, setting up shop with his cell phone and laptop in a Washington, DC, area coffee emporium. He’s the SBFA’s first full-time employee.
Hiring Denis, who also has association experience, represents “the next evolution” of the trade group, according to David Goldin, SBFA president and Capify’s founder, president and CEO.
The SBFA, which got its start in 2008 as the North American Merchant Advance Association, changed its name last year because members have added small-business loans to the their merchant cash advance offerings. Although the trade group’s not exactly new, it has plenty of room to grow and its leadership and members seem open to change.
“The goal is to start from scratch and take a look at everything the association is doing,” Denis told AltFinanceDaily, “and to really build this out to a robust group that represents the interests of small businesses.”
Denis appears optimistic about pursuing that goal. He’s a native of the Boston area and a Harvard University graduate whose first job out of school was as an aide to Republican Sen. John E. Sununu of New Hampshire. After three years in that position, he took a job for two years with a UK-based trade association, traveling frequently to London to inform the group of Congressional action in the United States.
From there, Denis went on to become director of government affairs and economic development for the Cincinnati Business Committee, a regional association that included Fortune 500 companies among its members. After two years in that role, Denis joined the staff of Rep. Steve Chabot, R-Ohio, moving back to Washington and serving as the congressman’s deputy chief of staff during a five-year stint that ended when he joined the SBFA.
While working for Chabot, Denis also became deputy staff director of the House Committee for Small Business, the No. 2 position there, and he has held that job for the last three years. The committee’s tasks include learning as much as they can about small business, including financing, and using the information to advise members of the House on policy initiatives.
The experience Denis has amassed in government should serve the association well because his duties include briefing federal legislators and regulators on how the alternative-finance business works. With Denis as spokesperson, the industry can speak to government with a single voice, Goldin asserted.
“We are going to be aggressive in our outreach to legislators and regulators as well as be active reaching out to local, state governments,” Denis said. The SBFA will “work with other trade groups and small business groups to promote our mission to ensure small businesses have alternative finance options available to them.”
Until now, too many players from the alternative finance industry have been vying for lawmakers’ attention, Goldin said. To make matters worse, some of those seeking to influence government in hearings on Capitol Hill are brokers instead of lenders and thus may not have a perfect understanding of risk and other aspects of the business, he maintained.
“We’re hearing that there are people trying to be the voice of small-business finance that either don’t have a lot of years of experience or they’re not telling the whole story,” Goldin said. “We want to make sure the industry’s represented properly.”
Denis can draw attention away from the “noise” created by unqualified voices and focus on information that Congress needs to make reasonable decisions about the alternative finance business, Goldin maintained.
Besides getting the word out in Washington, the SBFA hopes to convey its message to the general public on “the benefits of alternative financing,” Goldin said. At the same time the group can help make small business owners aware of the finance options, Denis added.
Asked whether hiring Denis marks the beginning of an effort to lobby members of Congress for legislation the association deems favorable to the industry, Goldin said only that additional announcements will be forthcoming.
Meanwhile, updated “best practices” guidelines might be in the offing to help industry players navigate the business ethically and efficiently, Goldin said. A set of six best practices the association released in 2011 included clear disclosure of fees, clear disclosure of recourse, sensitivity to a merchants’ cash flow, making sure advances aren’t presented as loans and paying off outstanding balances on previous advances.
Addressing other possible steps in the association’s growth, Goldin said the group doesn’t plan to publish an industry trade magazine or newsletter. However, a trade show or conference might make sense, he noted.
Denis said he and the board had not discussed the possibility of a test, credential or accreditation to certify the expertise of qualified members of the industry. However, associations often establish and monitor such standards, so it would be reasonable for the SBFA to do so, he added.
The association might establish a Washington office, Goldin said. “We’ll look to Steve for his thoughts and guidance on that,” he observed. Denis seems amenable to the idea. “Down the road, we would love to open an office and hire more people,” he said.
In Goldin’s view, all of those moves might help the rest of the world comprehend the industry. Understanding the industry requires taking into account the cost of dealing with risk and business operations, he said.
Placing a $20,000 merchant cash advance, for example, requires a customer-acquisition effort that costs about $3,000 and a write-off of losses and overhead of about $4,000, Goldin said. That’s a total of $27,000 even without the cost of capital, he maintained.
“Most people don’t understand the economics of our business,” Goldin continued. The majority of placements are for less than $25,000, he said, characterizing them as “almost a loss leader when you factor in the acquisition costs.”
While spreading that type of information on the industry’s inner workings, Denis will also conduct the day-to-day for the not-for-profit’s affairs. The association’s board of directors will continue to set policy and objectives.
Members elect the board members to two-year terms. Current board members are Goldin; Jeremy Brown of Rapid Advance, who’s also serving as the group’s vice president; John D’Amico, GRP Funding; Stephen Sheinbaum, Bizfi; and John Snead, Merchants Capital Access.
Member companies include Bizfi, BFS Capital, Capify, Credibly, Elevate Funding, Fora Financial, GRP Funding, Merchant Capital Source, Merchants Capital Access (MCA), Nextwave Funding, NLYH Group LLC, North American Bancard, Principis Capital, Rapid Advance, Strategic Funding Source and Swift Capital.
Companies pay $3,000 in monthly dues, which Denis characterizes as inexpensive for a DC-based trade association.
Membership could spread to other types of businesses, Denis said. “I’d like to expand the tent to other industries,” he noted. “The association is trying to represent the interests of small business and make sure they have every finance option available to them.”
But a key purpose of the trade association is to provide a forum for members to come together as an industry, Denis said. “We’re thinking big,” he admitted. “We hope that all members of the marketplace will want to become a part of it.”
Should Funders Pay Lifetime Renewals?
January 24, 2016OPINIONS ARE LIKE A-HOLES RIGHT?
We all know what they say about “opinions” right? They (opinions) are basically like a-holes and everybody has one. I’ve stated a lot of opinions here on AltFinanceDaily over the last couple of months, while some might agree and others disagree, I always try to provide educated opinions to separate commentary from the generic pack of people blurting out comments across industry forums and media publications that might not have firsthand experience on the front lines.
With that being said, it’s in my sole opinion that every funder/lender should offer their independent brokers lifetime renewal compensation despite new deal volume.
BROKER AGREEMENTS SEEM TO CHANGE ON A WHIM
I’ve been reselling the merchant cash advance and alternative business loan products since November 2009, however, the current program structures/agreements of my funders and lenders look totally different today than they did in the beginning.
It’s almost as if a new agreement is created every 12 – 18 months with similar conditions, but certain terms might have changed, including the compensation of renewals.
Some funders and lenders will start without any provisions related to renewals, basically as long as the client continues to renew, then you will be allowed to collect commissions off the client. But later on down the line, some funders and lenders will change provisions and require certain levels of new deal volume in order to be compensated on renewals going forward. Most broker agreements have terminology listed that states that the funder/lender can change the program at their discretion, however, I believe that at no point in time (other than for particular circumstances of fraud or ethics violations) should a funder take away a broker’s renewal compensation as whatever “good” it’s supposed to be doing (which I still can’t think of any), I believe it does far more damage in return.
YOU CAN’T CLOSE WHAT YOU CAN’T GET APPROVED
Sometimes a broker doesn’t fund a deal within 3 – 12 months because the funder can’t approve any of the submitted deals. If the broker is like myself, I’m going to pre-screen all new applications to see if it fits the underwriting criteria before submitting it, as submitting applications that are outside the criteria does nothing but waste valuable underwriting resources. If they are a somewhat conservative funder, a lot of times a broker just might get too few applicants to fit the box.
WHAT DID YOU ACTUALLY SPEND ON MARKETING?
Funders and lenders receive free marketing from brokers because they bring them the deals, so what is the big deal about continuing to pay renewal compensation despite new deal volume? They don’t have to worry about taking the risk of putting marketing capital up on the table with a potential of no return. The person who puts up the capital is the broker, and they should be compensated for the lifetime of the client regardless of new deal volume.
As an independent broker, the individual is a part of the Mom and Pop Network, which is just a group of random brokers who resell for free (100% commission). Not only are funders/lenders receiving the free marketing from the resellers, but they are also receiving free data to utilize in any potential “big data” valuations for sell-off, or “big data” analysis for better market segmentation. In addition, if the broker’s portfolio of merchants (even if it’s just one merchant) didn’t default or the default rate is very low, what is the justification for cutting off the broker just because there was no new deal funded?
RENEWALS ARE THE LIFEBLOOD OF THE BROKER’S INCOME
Once upon a time, during the very early days of MCA, the product was pretty much a one-off project. A merchant had an emergency, they sold off a percentage of their future credit card receivables in exchange for some upfront cash today, and used the cash to address whatever emergency they were facing. If the merchant renewed, it was usually one time (twice if you were lucky) and that was it. Today, it’s a different situation if you set up your merchant based on their proper Paper Grade. Merchants are renewing back-to-back, a lot of times for 3 to 5 years (or more) in a row, which means that the product is becoming more of an integrated portion of their business (similar to the MCA’s Kin A/R Factoring) rather than a one-off occurrence. This means for a broker, there’s a lot of money to be made off of their MCA portfolio going forward and the entire point is to build your portfolio up to a particular size, where you can just “sit back” and solely manage the renewals of the portfolio without being required to continually produce new deals by spending more on marketing.
Take a broker with a portfolio of 25 merchants who renew just about every 6 months (twice a year) with an average funding of $75,000 with 5 points commission per deal. That alone is $3.75 million a year in funding volume and almost $100,000 per year in income, solely off the renewal portfolio. If the broker maintains this portfolio for 10 years in a row, that’s almost $38 million in funding volume and close to $1 million in income. Why on Earth would you want to even threaten to cancel a broker out of the deal when again, it was their ingenuity, rapport building skills and sales skills that are the foundation of the clients coming to the funder to begin with, as well as continuing to renew back-to-back?
YOU ARE ASKING FOR YOUR MERCHANTS TO BE FLIPPED OR STACKED
The broker is the one who has the original relationship with the merchant, thus, the merchant more than likely has more rapport with the broker than they have with anyone in the funder’s organization. Thus, cutting off the broker from the renewal compensation might do nothing but just cause the merchant(s) to be stacked or flipped to another funder/lender.
TELL ME WHICH BROKER IS MORE VALUABLE? BROKER A OR BROKER B?
Okay, so tell me which Broker is more valuable? Is it Broker A or Broker B?
– Broker A: Over the course of one year, Broker A brings in 15 new merchants, with only 4 of those merchants renewing once because the broker didn’t price the merchants in their proper Paper Grade and thus, a competitor stole them away at renewal. This produces a total of 19 advances (new/renewal) and let’s say with the average funding being $50,000 you are looking at volume of $950,000.
– Broker B: Over the course of one year, Broker B brings you only 8 new merchants, but 3 of them renew 4 times back-to-back (12 additional advances), 2 of them renew 3 times back-to-back (6 additional advances), 2 of them renew 2 times back-to-back (4 additional advances), and 1 of them renew only once, for a total of 31 advances (new/renewal). Keeping the average funding at $50,000 you are looking at volume of $1,550,000.
Broker B supplied fewer new deals than Broker A, but Broker B provided an overall higher level of production based on the rapport and proper structure they established with their clients that produced more renewals and advances in total for the funder. Seeing as though in our industry, when funders count their “total volume funded” they include both new and renewal volumes, how can it be that Broker B is not more valuable to a funder than Broker A is? Not saying that Broker A isn’t valuable, but based on potentially cutting off renewal compensation due to a lower amount of new deal volume, they would potentially be cutting off the Broker that offers more value over time.
THE FINAL WORD
Why on Earth would a funder or lender want to kick out a competent broker by cutting off their renewal portfolio? What does it solve to cut off a competent broker, with a low (or no) default rate, just because they didn’t bring in newly funded deals during the previous 3 – 12 months? What does that solve? Does cutting them off somehow produce more margin for the funders? More market share? Savings in some sort of area? As mentioned, the broker is likely to flip the merchants or stack the merchants when this happens, which again, does nothing for the funder in terms of providing any type of benefits or value.
The only justification for cutting off a broker is when they are engaged in unscrupulous acts. But cutting off competent brokers just because they didn’t fulfill some insane new deal volume policy, makes absolutely no sense because at the end of the day, cutting off the brokers will be like cutting off the funder’s relationship with the merchants as well. With the parade of new funders looking to grab market share, what better way to gain it than to partner with competent but dejected brokers, who just got their renewal compensation cut off for not fulfilling some insane new deal policy?
Loan Brokers: Fight Back and Defend Your Brand
January 16, 2016
LIFE DOESN’T PLAY FAIR AND NEITHER DOES YOUR COMPETITORS
Let’s face it, a big part of our job is customer service. As a direct funder or lender, or as a large or small brokerage, a big part of our job is to service our existing customers, partners, vendors and suppliers with the utmost integrity, efficiency and ethics. But even the best of customer service intentions can become scarred when those who compete against you, choose to compete unfairly through vile fabrications, defamations and falsehoods.
MORE MONEY, MORE PROBLEMS
Not many people (including myself) are too fond of hip hop music as most of the time the lyrics are questionable, but in 1997, everybody agreed with The Notorious B.I.G. when he touched on the concept of making more money and having to subsequently deal with new problems.
The bigger and more exposed you get, the higher the probability that you’ll have a run-in with dissatisfied merchants, partners, vendors and suppliers. This is common knowledge, as many of the largest ISO/MSPs and MCA firms are all over the ripoff reports in one form or fashion, with current and prior customers blasting the companies over sometimes legit issues, and other times issues of a petty nature that could have been resolved in means of a lesser depiction. But continuing on, the bigger you get, the bigger your “haters” will get as well. The rise of the internet has multiplied the presence of haters and trolls to a population standing taller than ever before. These haters love to use online discussion boards, social media, blogs, and review sites to spread their lies, hatred and vile.
JUST BECAUSE YOU SMELL SMOKE, THAT DOESN’T MEAN THERE’S A FIRE BURNING
I’m not sure who the author of this quote is, but it says the following: People will question all the good things they hear about you, but believe the bad without a second thought. Haters know this quote to be true and are quick to spread their venom knowing that if it’s coming from multiple sources, then far too many people will take them at their word using the flawed logic of “where there’s smoke, there must be fire.”
Well, I say just because you smell smoke, that doesn’t mean there’s a fire burning. Instead, you could more than likely have a group of haters who have perfected the art of blowing smoke, which is to make unfounded or exaggerated claims. As a result, you need to protect your brand against haters. There are those of you who believe that if you just ignore them then they will go away. Well, I disagree with that notion and so does Motorhead’s Lemmy Kilmister. “I don’t understand people who believe that if you ignore something, it’ll go away,” he was once quoted as saying “That’s completely wrong because if it’s ignored, then it gathers strength. Europe ignored Hitler for twenty years, as a result he slaughtered a quarter of the world!”
LOOK AT DONALD J. TRUMP
If he wins the candidacy or not, Donald Trump will go down as perhaps the most fiery presidential candidate of all time. When Trump believes something, he says it, without filter and without care of political expediency. When Trump is “attacked” by the media or one of his fellow GOP opponents, he fires back. On the O’Reilly Factor after the final GOP debate of 2015, Trump clarified that if the media or one of his GOP opponents makes a valid criticism about him, he’s perfectly fine with that, but what he has a problem with is when they flat out lie about something he’s said, done or believes in.
While I’m an Independent and not sure who I will support for the 2016 Presidential election, I find myself in agreement with Trump on a number of things, including how Trumps responds to “haters.” My stance is that if you have a valid criticism about something I’ve said, done or believe in, then I’m all ears! But when you flat out lie about me, now you are going to tick me off.
GET MAD, GET MAD!
One of the reasons for Trump’s surge in the polls is the fact that a lot of people are angry at leaders in Washington and aren’t going to “take it” anymore. Trump’s fiery persona attracts people to the real estate tycoon, causing him to have a massive lead in the Republican race. Like Trump, you should get mad as well if you have worked to build your brand, resumé and marketplace standing, and then all of a sudden here comes some anonymous troll spitting out all types of defamations across the internet:
- Don’t work with XYZ Company, they are a scam!
- XYZ Company stole my money!
- XYZ Company’s President is a criminal!
- XYZ Company backdoors deals!
The definition of libel is to write something about an individual or a company that is defamatory, which is a statement that is false but written in a way to convince the public that it’s true. The internet has increased the presence of libel so much, that insurance companies market their personal umbrella policies as a form of insurance in case you are sued for libel. Some people don’t realize that typing something on the internet can get you in trouble if you are lying about the person or the company in question. Now, I’m not advising you to run out and sue everybody who lies about you online, as that would be very costly, however, I am advising you to get mad by fighting back and doing some of the following to protect your brand.
FLOOD THE MARKET WITH TESTIMONIALS
Begin to flood the market with positivity. When a prospective client searches for your company in Google and finds the negative reviews, they can also see the various videos, blogs and review sites where your customers, partners and vendors are praising you. You can always say: Look at the many customer testimonials that we have and look at the size of our customer portfolio, clearly more people are satisfied with us than dissatisfied.
THE BETTER BUSINESS BUREAU
The BBB will provide you an “A+” or “A” rating as long as you respond to any complaints filed in a timely manner. You can use your “A” rating status in marketing and in response to prospective clients inquiring about negative reviews. You can always say: We have an A+ rating with the BBB, we must be doing something right.
PUBLIC RELATIONS
A lot of direct funders and large brokerages have large sources of operating capital to play with, so why not hire a PR Team? Have a PR Team speak with the media often to generate as much positive press as possible to help balance out the negative press. In addition, have the company CEO and other high ranking officials do various forms of PR when available.
TAKE THE FIGHT TO THE TROLLS
Go to the discussion board, social media post, blog post, vlog post, or website, and directly respond to the person creating the negative press. Debate your points, prove them to be wrong, show them to be a liar, and encourage your employees, vendors and partners to join in on the fight. Silence can be taken in one of two ways, either people will think you are “too big” for this petty non-sense, or they will think that you are silent because you are guilty. I say take the fight to the trolls, debate your points and then move on after you’ve put the verifiable truth on the table.
THE FINAL WORD
Some people will already know something is a lie, but choose to believe it anyway because they want it to be true regardless. Sean Parker’s character from the Social Network said that, “even if you’ve managed to live your life like the Dalai Lama, they’ll still make things up because they don’t want you, they want your idea.” The honest truth is that most of your haters are just jealous of you because, you have something that they want but don’t have. So, don’t allow them to throw you off your game.
As a quote I read the other day from some unknown source said, “you should never hate people who are jealous of you, but instead respect their jealousy as they are the people who think that you’re better than them.” Having haters is a sign that you’re doing something right. Your prospective customers and partners with good judgment should be able to read between the lines to see the truth, and for those that can’t, well, maybe they are too gullible (and stupid) to be doing business with anyway.
