Do Bank Statements Matter in Lending? Business Lenders and Consumer Lenders Disagree
July 16, 2015Bank statements. Those in consumer lending argue they’re all but irrelevant because FICO and credit reports do the job of predicting risk just fine, but over in today’s small business lending environment, there’s an entirely different sentiment; Reveal your recent banking history or be declined.
After having bought nearly $60,000 worth of consumer notes on Lending Club and Prosper combined, there’s something I’ve seen a lot of, bounced ACHs.
Lending Club doesn’t reveal borrower bank data to their investors. Sure, anyone can see the credit report, the income level, zip code, and job title, but the borrower could have negative $10,000 in the bank and be living off overdraft protection on day 1 and an investor would never know it.
For all the fanfare surrounding online marketplace consumer lending, access to borrower banking history is oddly absent.
“Welcome to consumer lending, where the rules are different because the game is too,” replied a user to my comment on a peer-to-peer lending forum.
Veteran consumer lenders assumed I was a lost newbie who knew nothing about lending. “I have a feeling if you ask to crawl someone’s bank account, they’ll just go elsewhere,” one user said. “Seems that’d only work on subprime borrowers who have limited bargaining power.”
“I’m assuming you may be new to lending,” he continued. “Making a loan based on deposit balances is rarely a good idea.”
My initial question to them was that without bank statements, how could they ascertain if a borrower’s finances were actually in order at least at the time the loan was issued? It’s really easy to access someone’s banking history for the last 90 days by using common tools like Yodlee or Microbilt, I argued.
Some people sympathized with my logic but others believed requesting bank data would be suicide in today’s competitive environment. And still more wondered if there might be consumer protection laws that prevented lenders from seeing a loan applicant’s banking records (which sounded ridiculous).
A Credit Card Issuer’s Take
Those questions led me to interview an underwriting manager at one of the nation’s largest credit card issuers who would only speak on the condition of total anonymity, including the bank’s name. There, he oversees a department of people that manually assess credit card applicants. There is no algorithmic approval process. In his department, humans underwrite each application, conduct phone interviews with the prospective borrowers, and request additional documents if they feel it’s warranted.
Requesting bank statements is a regular part of the job, explained the manager. “We require proof of income for any line over 25k,” he added. “It’s the main thing we ask for along with proof of address.”
Requesting these documents keeps them compliant with the Bank Secrecy Act, he explained, but the bank statements in particular are their first choice in verifying somebody’s income, even more than pay stubs. And their underwriters aren’t oblivious zombies, he noted. If an applicant has no money in the bank, they’ll decline it.
“The Adverse Action reason [for that] would be ‘sufficiently obligated’,” he stated. “That’s when their bank account shows they can not take on any additional financial obligations.”
The manager shared however that he believed there is a very strong correlation between what’s on the credit report and what to expect in the bank statements. Generally speaking, good credit will show a healthy banking situation, he explained. They’re rarely taken by surprise. Overall, the credit reports and phone interviews are enough for them to feel comfortable and the bank statements are really just there to check off a compliance box.
Meanwhile, those that speculated requesting bank data would be a death knell competitively might want to talk to Kabbage’s sister company, Karrot. Karrot already crawls bank accounts as part of their consumer loan application program and competes with Lending Club, Prosper, and Avant. Considering Kabbage has funded more than half a billion dollars worth of business loans using this very methodology, it’s safe to say that applicants aren’t flocking to competitors in droves over the perceived injustice or inconvenience of filling out three additional fields on a web application to share their transaction history.
Bounced Payments
Kabbage CEO Rob Frohwein offered these comments last year about their underwriting, “A critical aspect of consumer lending is determining the appropriate amount of a payment to collect so that an account doesn’t become overdrawn. Our intelligence accurately predicts how much of a payment to request via ACH so consumers avoid the cost and headache associated with non-sufficient funds.”
I thought about those statements when I noticed that thirty-six of my Lending Club notes carried a Grace Period status the other day. These are borrowers whose payments just recently bounced. Some are only three or four months into a five-year loan. Worse, there are those that are saying they have no money whatsoever to make a payment. How can this be when they just practically got approved?
To the consumer crowd it’s business as usual. “If you got their bank account, you still wouldn’t be able to predict who will default. You can’t predict defaults on any individual borrower,” argued one veteran on a forum.
But it’s not all about the lender’s tolerance for risk. ACH rejects can have consequences that affect a lender’s ability to debit accounts in the future.
“Ultimately, regulatory thresholds set by NACHA will continue to become more and more critical of returns,” said Moe Abusaad of ACH Processing Co, an ACH processor based in Plano, TX. “I think it’s safe to say that there is a positive correlation in considering statements as a component of the underwriting process to the rate of returns incurred,” he added.
And while it’s true that bank data can’t make predictions perfectly on its own, nobody in small business lending or merchant cash advance would consider an approval without it.
Bank Statements or Bust
“There is no substitute for banking information when reviewing a client for approval,” said Andrew Hernandez, a co-founder of Central Diligence Group, a risk management firm that allows business lenders and merchant cash advance companies to outsource their underwriting.
“Money moves fast through these businesses and every business is unique, so a lot more variables come into play than just having to account for the timely monthly payments of credit cards, cars, and mortgages as you find in the consumer world,” he added. “A FICO score along with other information presented in a credit report provide a detailed, historical snapshot of a client’s creditworthiness in consumer lending, and while these are great complementary tools for us to use in our underwriting process, I believe that banking data paints us a picture of its own which is absolutely essential in assessing the risk of a B2B transaction in our space.”
Those underwriting business loan deals have reported seeing applicants with open personal loans from Lending Club, which shows that the exact same borrowers are being underwritten in two different ways.
But Julio Izaguirre, another co-founder of Central Diligence Group added that, “banking transactions are essential in gauging the cash flow of the business by looking at recent and up-to-date bank volume, but it is even more important with businesses that lack historical data and cannot provide financials or other documentation to show and prove their track record.”
Translation: A lack of credit history and formal financial statements can be overcome thanks to in-depth analysis of bank account data.
“When our underwriters look at a bank statement you can get a better understanding of the business cash flow, operational cost and how the owner manages his business,” said Heather Francis, CEO of Gainesville, FL-based Elevate Funding. “The credit score is like a person’s blood pressure reading,” she continued. “It indicates there may be an issue but until lab work is pulled and analyzed you don’t know what that issue is. The bank statement is that lab work and it can tell you more about the issues behind the scenes than a credit score can.”
Greg DeMinco, a Managing Partner of Americas Business Capital based in Cherry Hill, NJ would probably agree. “FICO isn’t everything,” he shared. “Bank statements can tell a great story especially if there is upward momentum month after month, and more importantly a high ratio of deposits to requests for the advance.”
Meanwhile, the manager of the credit card issuer was surprised to hear about the high value placed on bank statements in business lending. I offered him the example of an applicant with good credit that was consistently negative in the bank because of a reliance on overdraft protection as a way to make sure all the bills were being paid. “That’s the craziest thing I ever heard,” he commented.
But over in the peer-to-peer lending forum it didn’t sound so crazy at all. “Plenty of Americans are ‘broke’, in the sense that they have negative net worth, yet they’ll continue servicing their debts for… a long time… no matter what it takes,” shared one user.
The argument seems to come full circle, that business lending and consumer lending are just different.
But to Isaac Stern, the CEO of New York-based Yellowstone Capital, the bank statements are not just about financial health. “We are literally underwriting against fraud,” said Stern, who said his office regularly receives applications with doctored statements. “Logging in [to the banks] and verifying those statements are probably the most important part of the process,” he noted.
His logic goes that a consumer that is paid a salary has a predictable stream of income and so that information along with a credit report might be enough for a consumer lender, but business revenue is less predictable and can vary practically day-to-day.
“You can’t just look at a FICO score and say, ‘this is a good a business’,” Stern explained. “The story is in the bank statements.”
How Hot Is The Legal Cannabis Industry?
February 24, 2020
One gauge of the commercial excitement over legal weed, medical marijuana and cannabis’s byproducts could be witnessed at the Las Vegas Convention Center in early December where the Marijuana Business Conference & Expo was overflowing with 31,523 attendees.
Appealing to that audience—roughly the population of Juneau, Alaska—were more than 1,300 exhibitors who hailed from 79 different countries and touted products and services as varied as advancements in crop cultivation, medicinal breakthroughs, and innovative consumer products like marijuana-laden pastry.
That’s some 30% more than the 1,000 vendors who packed into the Central Hall in 2018 and about double the 678 who were showing off their wares in the smaller North Hall two years ago, reports Chris Day, vice president for external relations at Denver-based Marijuana Business Daily, which follows the cannabis industry and sponsored the Las Vegas trade show.
“In December, 2019,” Day declares, “we did not have to turn people away because we expanded. We had enough room for exhibitors but we needed both halls.” Unable to resist a boast, he adds: “We’ve been the fastest-growing trade show in the country three years running.”
One face in the December crowd was seasoned financial broker Scott Jordan, the Denver-based managing director of the Alternative Finance Network. He was occupying a booth accompanied by two attractive female models in fetching T-shirts emblazoned with the message: “How much would you borrow at zero percent?”
The young ladies’ arresting appearance and the message worked to the extent that “it got people talking,” Jordan says. As for the zero-interest rate, it’s not exactly free money. “I’ve got a product that puts together a line of credit,” he explains, “and after they receive the line of credit, it charges them a fee.”
As a broker, Jordan does the spade work of poring through a cannabis business’s financial statements and business model before he tees up a deal—typically between $250,000 and $750,000—to “a cadre” of 35 lenders in 10 states. He’ll ascertain whether the best funding option should be structured as equipment leasing, a working-capital loan, a revolving line of credit, project financing, or a real estate loan.
One recent cannabis deal that Jordan midwifed involved a “post-revenue, pre-profitability” manufacturing and processing company headquartered in Colorado. The financing, which closed in April, 2019, involved a pair of four-year term loans: one for $400,000 to refinance existing machinery, and a second for an additional $500,000 to acquire new laboratory equipment. Both credits carried interest rates in the “mid-teens,” he says, and were secured by the equipment.
Once the debt financing was in place, the manufacturing operation was “fully functioning,” Jordan reports, paving the way for the company to raise $30 million in venture capital financing. Jordan argues that “even if they pay a 10-20 percent interest rate, it’s better to preserve equity and finance through a normal type of loan. If you need an extraction machine or packaging equipment,” he adds, “why give up equity if you can finance it through debt?”
Jordan’s reasoning appears to sit well with clients and funders alike. Since 2014, he has brokered 85 transactions worth $33 million. He reckons that two out of three deals that he takes to funders meet with success. “My best year was 2015 because there were only a few competitors and I was the only guy on the block,” he says.
As the country steadily decriminalizes and legalizes pot, however, early market entrants like Jordan no longer have the cannabis business all to themselves. Thirteen states have legalized recreational marijuana for adults. These include California, Colorado, Oregon, Washington and Nevada in the West; Illinois and Michigan in the Midwest; and Massachusetts, Vermont and Maine in the East. Hawaii and Alaska permit it and, if you’re over 21, you can legally grow, smoke or ingest weed in the District of Columbia, but it cannot be sold commercially.
An additional 24 states have approved medical marijuana. While research on cannabis’s medicinal properties remains thin—largely because of objections by federal law enforcement—it is being prescribed for a range of maladies, including cancer, glaucoma, epilepsy, Crohn’s Disease, multiple sclerosis, nausea, and pain. [“The marijuana plant contains more than 100 different chemicals called cannabinoids,” according to WebMD. “Each one has a different effect on the body. Delta-9- tetrahydrocannabinol (THC) and cannabidiol (CBD) are the main chemicals used in medicine. THC also produces the ‘high’ people feel when they smoke marijuana or eat foods containing it.”]
Industry data assembled by MJBizDaily reflects both the broad acceptance of legal cannabis use and its increasing commercial popularity. U.S. revenues from legal weed and its byproducts are expected to clear $16.4 billion this year, a 40% growth rate over the $11.75 billion in estimated revenues for 2019. The legal cannabis industry now employs about 200,000 persons in the U.S., about the same number as flight attendants (120,000) and veterinarians (80,00) combined.
For more evidence that the cannabis market is hot look no further than the state of Illinois, where recreational marijuana went on sale Jan. 1, 2020. The Prairie State’s governor also pardoned some 11,000 citizens with criminal records for possession and the sale of low levels of marijuana.
“We’re showing that sales were close to $3.2 million on the first day of 2020,” says MJBiz’s Day. “Illinois is the big story right now,” he adds. “Anytime a new state opens up in the market, you’re seeing enormous pent-up demand and enthusiasm.”
Even as the cannabis industry takes giant strides toward public acceptance, the plant continues to face hostility from the U.S. federal government, which has criminalized its use for 80 years. Marijuana remains classified by the Drug Enforcement Agency as a Schedule 1 drug, keeping company with heroin, LSD and Ecstasy.
That designation has also made it hard for the cannabis industry to engage in simple financial transactions, much less obtain financing. “Despite the majority of states’ having adopted cannabis regimes of some kind, federal law prevents banks from banking cannabis businesses,” Joanne Sherwood, president and chief executive at Citywide Banks, a $2.3 billion-asset bank headquartered in Denver, testified to Congress last summer. “The Controlled Substances Act,” added Sherwood, who is chair of the Colorado Bankers Association, “classifies cannabis as an illegal drug and prohibits its use for any purpose. For banks, that means that any person or business that derives revenue from a cannabis firm is violating federal law and consequently putting their own access to banking services at risk.”
And despite the herculean efforts by the cannabis industry to soften its image, obtaining financing from traditional sources like pension funds, insurance companies and university endowments remains a daunting proposition as well, says David Traylor, senior managing director at Golden Eagle Partners. His four-person, boutique investment fund, which makes equity investments in up-and-coming cannabis companies, relies on wealthy individuals and family offices for the bulk of its funds.
“Capital is hard to come by for this industry,” Traylor says. “From day one, most venture capitalists have been staying out of it. It’s still illegal in many states and their limited partners are endowments like Harvard and Yale, which see marijuana as the antithesis of education.”
Sarah Sanger, chief financial officer at Oak Investment Funds, a real estate investment firm based in Oakland, says: “There’s a great deal of economic activity in California but it’s stymied by the lack of financing and difficulty with changing regulations. It provides an opportunity for really expensive debt from private investors willing to do due diligence.”
That absence of establishment financing has opened up a plethora of opportunities for alternative funders, and not just in agriculture and plant cultivation. While agriculture represents the bedrock of the industry there is no downstream product, of course, without the cannabis leaf— growing and harvesting cannabis is just one stage of the industry’s life cycle.
MJBiz’s Day notes, for example, that that the legal cannabis industry is regulated for safety, so growers must show that “the flower has no molds or contaminants.” That means that crops are subject to rigorous testing and decontamination, which requires both materials and expertise. To process the leaf and develop “infused products” by extracting cannabis-based oils entails the purchase and deployment of costly technology. Packaging and labeling along with tracking systems that, Day says, “are stricter than in other places” are also key components of the farm-to-market supply chain.
Meanwhile, in an ongoing effort to appeal to a fresh cohort of customers, Jordan notes, the cannabis industry continues to develop innovative uses for the plant. “There are so many applications and new products that keep appearing, like ice cream with marijuana, vaporizers, inhalers, and syrup,” he says. “Now, there are mints—something I hadn’t seen before—and different ways to ingest the product and get high and not look like a druggie.”
Jordan Fein, chief executive at Greenbox Capital in Miami, says his firm prefers to fund downstream companies selling cannabis products. “We do agricultural lending but it’s less attractive and harder to qualify the business. It’s not as tangible as a retail business which will have a website and product reviews. The same goes for edibles.”
Recent Greenbox Capital deals in 2019, Fein says, included one with merchant cash advances of $80,000 and $60,000 in growth capital to a Colorado dispensary. The operation put the money to work adding two retail outlets during the year, he says, bringing to four its total number of storefronts. In addition to cannabis flower, the dispensary sells “edibles, tinctures, lotions, and wax concentrates,” Fein reports. Both short term cash advances require regular ACH payments.
Greenbox Capital also made a $135,000 cash advance to a cannabis-testing laboratory in Southern California in August, 2019 for the purchase of sophisticated equipment. The company, he says, is doing $140,000-a-month in revenue and cashflow is strong and on the rise.
“Greenbox is always interested in higher risk deals,” Fein says, noting that banking services remain off limits to legal cannabis firms. “But we fund them for the same reason we fund lawyers and auto sales—things that most others will not do. There’s nothing wrong with risk,” he adds, “as long as you clearly assign a proper value to the deal and price to it.”
Steve Sheinbaum, a New York broker and chief executive at Circadian Funding, has unabashedly climbed aboard the cannabis bandwagon. “The market is exploding and it’s attractive to lenders because it’s a product people can put their hands on,” he says. “If I’m dealing with a grower, I can leverage real estate and usually there’s equipment. If they’re producing, there’s inventory and I can look at the income statement to see what kind of cash flow the business is generating.”
He recently brokered a $10 million loan for a licensed grower and distributor of medicinal marijuana in New England with monthly revenues of $3-$4 million. The credit bore a 17% annual percentage rate and a six-year maturity, he says. The deal was brought to Circadian by a private equity investor who was looking to grow the enterprise tenfold. The deal, which was interest-only, was secured by a second position on real estate and a lien on the borrower’s license. “The lender was comfortable with the interest-only loan,” Sheinbaum explains. “They can refinance in six years.”
In another recent deal, Circadian arranged an unsecured merchant cash advance for $300,000 to a Pacific Northwest technology company developing specialty, point-of-sale software for the cannabis industry. The firm showed monthly revenues of $300,000.
“It’s not federally permitted for cannabis firms to take payments from Visa, Mastercard or American Express,” Sheinbaum explains. “But this technology company is using debit or credit cards to pay for cryptocurrency which is stored on a prepaid card which customers can then use to purchase cannabis.”
The tech company had been struggling to find money and Sheinbaum took satisfaction in a deal announcement that went out in an e-mail to the industry. “Funding complicated deals is what gets our blood flowing,” Sheinbaum wrote. “Anyone can get a restaurant or dentist funded. No one needs help with that.”
Manny Columbie, a Miami-based senior funding manager at H&J Capital Group, an Orlando firm, reports funding agricultural and dispensary businesses in California, Colorado and Washington State. In the Evergreen State, he says, he recently provided funding to a woman who owned a marijuana-themed café connected to a cannabis dispensary. The deal went through after examining her recent bank statements and two years of federal tax returns.
“The best thing about lending to people in this industry is their ability to repay,” Columbie says. “They’re never lacking in funds.”
He provided more detail on a deal currently in the works involving a physician in Irvine, California, with an 800-plus credit score from the rating agency Experian and personal tax returns showing $2 million in annual income. The doctor, Columbie says, has been making transdermal patches infused with THC in addition to his medical practice and needs specialized equipment to lower his manufacturing costs to 55 cents per patch. The patches sell for $40-$60 apiece, Columbie says, depending on the THC content.
If the deal goes through and is approved by H&J’s credit committee, the physician would likely be extended a $350,000 loan with a 10-year maturity secured by the Chinese-manufactured equipment. Factoring in the doctor’s excellent credit and other positives, the interest rate on the credit could be as low as 5%-7%.
While the environment for legal cannabis seems to grow more favorable by the day, market participants urge funders to remain circumspect. One remaining fly in the legal cannabis ointment has been the persistence of an illegal black market. Estimates are that as much as 60% to 80% of the marijuana market in California is illicit, says Craig Behnke, an equity analyst at MJBiz.
Law-abiding businesses must also contend with overbearing regulators and high taxation. The California Department of Fee and Tax Administration recently jacked up its excise tax on cannabis to 80%, effective on Jan. 1, 2020.
And the state’s constabulary isn’t helping matters either, notes Sanger of Oak Funds. “There are going to be a lot of operators that end up being losers because of the regulatory environment,” she says. “Law enforcement is using all of its resources to make sure legitimate businesses are following the rules instead of clamping down on black market activity. That makes it harder for legitimate retailers to make money because people are still shopping in the black market.”
The recent collapse of the shares of publicly traded Canadian cannabis companies, which some blame in part on the illicit competition from the black market, also stands as a cautionary sign. Last August, the Motley Fool listed ten “Pot Stocks”—including Canopy Growth and Aurora Cannabis, both of which are listed on the New York Stock Exchange—that together lost a stunning $20 billion in market capitalization.
The drubbing that heedless investors have taken in the Canadian stocks reminds analyst Behnke of the debacle in dotcom stocks back in 2001-2002, but with a big difference. “The dotcoms were a brand-new invention and people had no idea how big the Internet companies would be,” he told AltFinanceDaily. “But cannabis has been around for a thousand years. I feel like it was a shame on investors and the companies. This shouldn’t have happened.”
For ISOs Only — How To Develop Your Factoring Brokerage Business (Part 3)
January 9, 2020
CONGRATULATIONS!!! You have finally made the decision to quit “stepping over” those hundred-dollar bills and establish a factoring brokerage business!
But here’s the problem. With literally THOUSANDS of hundred-dollar bills spread all over, WHERE and HOW do you start picking them up?
To be sure, you need a GAME PLAN for doing so, right? Well, today’s your lucky day because that’s exactly what Part 3 of our series is about; “HOW TO establish a GAME PLAN for establishing your factoring brokerage business”.
But first, a couple things to keep in mind. The first is that the closing and funding cycle for factoring is much longer than an MCA, and typically takes from a few days to a couple weeks. However, once your merchant is set up, they will typically fund invoices EVERY MONTH.
What that means to YOU it’s like getting an automatic renewal every month, because you’re GETTING PAID for the life of the factoring relationship. And that automatic monthly paycheck will keep getting bigger and bigger with every new factoring merchant! True “residual income”.
The second thing to consider is that you will need to identify the “mix” of factoring funders to do business with and get set up with as a broker.
While we touched on the topic of finding factoring funders in Part 2, we could actually do a series on this subject alone. Keep in mind that funders specialize by industry, i.e. construction, medical, trucking, etc., while others are generalists, and fund a broad range of industries both domestically and internationally.
OK. So, let’s get started. It’s basically a 2 step process. (Don’t worry. We’ll teach you how to dance.)
STEP 1: Take A Look in The Mirror
3 things you want to look at:
- The first is the size and structure of your existing ISO organization. What size is it? Are you a one-man shop? How many ISOs do you have in-house? How many in the field? Do ISOs in the field work under your umbrella or do they work under their own? Who makes the decision on which MCA funder to use?
This is important because the size and structure of your ISO organization will help you in determining which GAME PLAN OPTION is the BEST FIT. More on that later…
- The second thing you want to look at is how your existing merchant database is organized. This could range from a box of index cards to a computerized database where you can pull up contact info for every prospect, merchants funded, funding date, funded amount, commission, renewal date, and maybe even blood type. (Don’t laugh. Some guys are anal like that).
This is important because, regardless of how or where you keep this info, your existing files are where you’re going to find “low hanging fruit”.
More specifically, these are YOUR merchants who sell B2B with receivables RIGHT NOW! Plus, most are generating new invoices every month, and are PERPETUALLY WAITING to get paid. But let’s face it, you can’t sell the guy a new position every month (even though you might like to) because they obviously can’t sustain it. But now you have a solution that will.
- The last thing you want to look at is how you do your marketing; i.e., telemarketing, lead purchase, direct mail, email marketing, door to door, media advertising, etc. This is important because to be successful with integrating factoring into your existing business, you will need to integrate it into your existing marketing medium and message as well.
There are several ways to do this, but it essentially boils down to 3 simple questions:
- Do you sell B2B? Even restaurants who offer commercial catering could do more business if they didn’t have to wait 30 days or more to get paid.
- Roughly how much do you have outstanding in receivables?
- Would you be interested in looking at how to convert your invoices into cash with no payments?
Why Do We Need to Look in The Mirror?
REGARDLESS of how you operate your business, the purpose of this exercise is NOT for you to be judgmental (it is what it is), but simply to help you determine which GAME PLAN OPTION you feel is the BEST FIT for you. But to do so you have to be honest with what you see. That’s what “LOOKING IN THE MIRROR” is all about.
In starting a new year, we ALL would like to do better. And as much as we might consider making radical changes to our business model and even our personal lives, (i.e. losing 200 lbs. in 3 weeks), the changes that have a better chance of sticking are those we gradually integrate into our lives and business over time.
In other words, establish realistic goals for your new factoring brokerage business, establish a GAME PLAN for doing so, and over time you will gradually, and consistently generate positive results. Now, where’s that pie?
2. Select Your GAME PLAN Option
Once you’ve taken stock of where you are, the next step is to look at options for integrating factoring into your day-to-day operations.
Below are 3 GAME PLAN OPTIONS to consider;
OPTION 1: “Limited Service” Broker/Referral Agent
This option which might appeal to small ISO organizations or one-man shops. Once you have identified a factoring prospect and they have expressed interest in moving forward, make the introduction to your selected factoring funder, and for the most part, step back from the process.
HOW you do the introduction is totally up to you and can range from a three-way call, email, or even text in some cases. Regardless of how you do it, you want to make sure your Factoring Funder knows the referral came from you in order to get paid.
The funder will typically keep you posted as your merchant moves through the process. However, don’t forget. It’s YOUR merchant and YOUR money. So, don’t hesitate to follow-up with both.
This is essentially what I refer to as a “low touch” approach, designed for ISOs who want to start picking up one hundred-dollar bills, but have limited time or resources for doing so. At a minimum, it gets them in the game and launches a “new profit center”.
OPTION 2: “Full Service” Broker/Referral Agent
The full-service referral broker operates much like a traditional ISO does for MCAs. You work with the merchant to compile their factoring app package and submit it to the funder. In addition, as questions arise during underwriting, the funder may reach out and in some instances seek your help in addressing them.
Depending on the size and structure of your ISO organization, you might want to consider establishing an in-house Factoring Desk. This would be an individual designated as the point of contact between the referring ISO, the merchant, and the factoring funder.
There are multiple benefits for taking this approach. For one, you centralize the decision-making on the factoring funder best suited for the merchant. In so doing, your Factoring Desk should be familiar with each funder, their doc requirements, approval criteria, rates, terms, timing, etc.
Second, establishing an in-house Factoring Desk will limit the number of ISOs reaching out directly to your factoring funder. This is important because you don’t want an ISO to suggest, demand, or work outside the scope of your broker relationship and agreement with the funder.
Finally, establishing a Factoring Desk will facilitate a rapid response to getting your factoring deals done. The last thing you need is for a deal to be “stuck on someone’s desk,” simply because they shifted attention to work on something else.
OPTION 3: Broker/ Referral Partner Relationship
This option involves establishing a broker/referral relationship with an established entity which specializes in factoring and other forms of asset-based lending. This relationship can also be blended with Option 1 or 2.
For this arrangement to make sense, the broker/ referral partner should be well established and bring several things to the table including;
- Extensive and detail knowledge of the underwriting, due diligence, documentation, closing and funding process.
- Established relationships and history with a diverse mix of funders.
- Experience in addressing one of the fastest growing issues factoring funders are facing, which is resolving UCC filing issues, particularly within the MCA industry.
- Relationships with factoring funders who fund in “second position” behind other secured parties, including traditional bank financing.
- Knowledge and experience of other forms of financing including purchase order financing, material supply financing, etc.
To be sure, the right relationship will enable you to accelerate the funding process for your merchants while learning from their experience as well.
By the way, in Part 2 of the series, I mentioned a client who needed funding for 63 purchase orders to 63 different locations, of which half were expired. Well, I am pleased to announce they were funded!
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