Starting an ISO Shop? Here’s What You Need to do Differently

It’s not news that commercial finance brokers are hurting and some are even calling it quits. The industry that didn’t ask for more than a phone and a sharp sales acumen from anyone wanting to start an ISO shop is now stifled with competition. The low barriers to entry that welcomed new companies is causing a seismic shift in the way brokers do business. While some are ready to leave, most are still grappling with the changing times.

What’s different about the business now? Almost everything, some say. Gil Zapata who runs a four year old ISO shop, Lendinero, says clients were desperate for money when he started. However he doesn’t think of the competition as fierce but just messy. “There are brokers and ISOs entering and clogging up the system,” he said, “They are obviously fly-by-night and get pulled into it thinking the industry is a fast money maker but it’s really not.”

Competition did what competition does, drove prices and commissions down, costs up and hacked the product. For instance, daily payment ACH loans strongly tied to historical cash flow history didn’t exist. Neither did fancy verbiage for them. The onslaught of online lenders that entered the industry didn’t help either.

OnDeck started selling term loans, which had some similarities to other daily payment products, said Chad Otar, founder of New York-based MCA company Excel Capital Management. “ISOs, on their part have to be careful while pitching these products to clients, explain the contract clearly to avoid penalty.”

The competition has also led to loan stacking, much to brokers’ and lenders’ contempt. And the online lending ilk of Lending Club, Prosper and OnDeck cannot escape it either. Last week, (June 10th), Reuters ran an article calling stacking the latest threat to online lenders where “soft credit inquiries” and “patchy reporting” results in multiple lenders making loans to the same borrower, diminishing the ability to pay.

“Deals become impossible to structure and it becomes difficult for lenders to keep clients on the books when there are second and third names,” said Zapata. The proliferation of loan products that succeeded as a result of competition was a double edged sword. While there are more products to be sold, there are not enough borrowers to lend to.

From a funder’s perspective, that means acquiring and retaining a customer on price rather than an ongoing relationship. “The increased competition has led to commoditization of the MCA,” said Sol Lax, CEO of New York-based business funder Pearl Capital. “It was an exotic financial instrument 5 years ago and the ability to set up shop was restricted. That has changed.”

The ISOs are increasingly reliant on renewals, thanks to the high marketing costs. “A real differentiating factor is whether an ISO syndicates, their default rate, and their renewal rate. All of it is intertwined so that ISOs need to view their business more like investors and less like brokers,” Lax said.

So what would ISOs have done differently? Otar says he would have started an industry coalition similar to the Innovative Lending Platform Association. “I would have tried to pull a Godfather and formed a coalition with other companies and self regulate.”

For Zapata, doing things differently would have meant finding an early backer. “If I had to do this over, I’d have a good investor behind my back,” he said. “Find someone who knows the business and have a good game plan. If you don’t have deep pockets, your chances are minimal.”