Merchant Cash Advance Syndication is a Myth. Residual Commissions are Back

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mind blownSales reps used to get paid half their commission upfront and the other half over time depending on how the deal performed. The back-end commission was called the cash advance residual. Brokers had an incentive to service the customer on an ongoing basis because their compensation depended on it. Under this system, interests were as aligned as funders believed they could be. When new merchant cash advance funders entered the market however, they found they could break existing broker-funder loyalties by paying the same amount just in a different way. “We’ll pay you all upfront,” they said to brokers, just to get their business.

It worked. 100% upfront commissions were so popular that they took over the industry. The only problem was that after a while funders started to notice that some brokers were nowhere to be found when problems arose with the customers. And why would they be? They didn’t stand to gain anything by continuing to be involved. Time spent on retention and service was a non-revenue generating activity for brokers.

The deal went bad? So what. Not my problem. You funded the deal, you deal with it.

Enter syndication which was as much a reaction by funders to try and restore broker alignment as it was a pursuit by brokers jealous of the return funders were getting. Funders loved that brokers desired their yield and the restoration of shared values that would come with sharing in it. Ironically, some of today’s syndication arrangements mimic the old cash advance residual system so much that it appears the funders of yore have tricked the brokers back into their ancient arrangements and with worse terms.

Don’t believe me? Consider that commissions used to always be paid on the purchased amount, not the advance amount, which means the brokers were earning the same rate of return that the funders were, just like syndication.

5-10 years ago
Broker is paid 5% upfront and 5% as the deal performs (both are a percentage of the purchased amount).
$10,000 advance purchases $13,000 in future receivables.
(.05 x 13,000) That’s $650 upfront and $650 over time. Broker earns $1,300.

Broker is paid 10% upfront on the funded amount.
$10,000 advance purchases $13,000 in future receivables.
Broker requests to syndicate their full commission in the deal to earn the same return as the funder.
$1,000 is syndicated into the deal. Broker earns $1,300 over time and only as it performs.

syndicating commissionsIn the second scenario the broker gets nothing upfront and is paid out over time. The broker also might pay a management fee for servicing their “investment.” The end result is that today’s broker makes less and believes they are investing their commissions. In reality, they have allowed the funders to completely turn the compensation tables around. It’s not only a return to the old cash advance residual system but a system that eliminates upfront commissions in favor of just the residual, a funder’s dream.

As it used to be, if the broker charged a 1.40, they’d earn 10% of $14,000. If the broker charged a 1.20, they’d earn 10% of $12,000. The broker’s compensation not only perfectly mirrored the funder’s return, but they also got half of that return upfront! Imagine syndicating $1,000 into a deal knowing you’d get $1,300 if it performed but then you get $650 of it upfront whether the merchant made a single payment or not. You’d take that deal all day wouldn’t you?

Admittedly, there are a lot of different ways that commissions are paid today but the system of syndicating commissions is one of the industry’s most clever tricks.

Are you syndicating or has the funder really just converted your commissions into a residual only system?

Last modified: March 24, 2016
Sean Murray

Category: merchant cash advance

Home merchant cash advance Merchant Cash Advance Syndication is a Myth. Residual Commissions are Back