Underwriting 101—Veteran Funders Share Tools of the Trade
For brokers, funding partnerships are critical to success. But making the most of these connections can be elusive.
“Transparency, efficiency and a thorough scrubbing on the front end can help the whole process,” says William Gallagher, president of CFG Merchant Solutions, an alternative funder with offices in Rutherford, N.J. and Manhattan.
Gallagher recently moderated an “Underwriting 101” panel at Broker Fair 2018, which deBanked hosted in May. The panel featured a handful of representatives from different funding companies discussing various hot-button items including striking the proper balance between technology and human underwriting, trade secrets of the submission process and stacking. Here are some major takeaways from that discussion and from follow-up conversations deBanked had with panel participants.
Each funder has slightly different processes and requirements. Brokers need to understand the different nuances of each firm so they know how to properly prepare merchants and send relevant information, funders say.
Many brokers sign up with funders without delving deeper into what the different funders are really looking for, says Jordan Fein, chief executive of Greenbox Capital in Miami Gardens, Fla., that provides funding to small businesses.
For example, there are a growing number of companies that rely more heavily on advanced technology for their underwriting, while others have more human intervention. Brokers need to know from the start what the funder’s underwriting process is like—the nitty gritty of what each funder is looking for—so they can more effectively send files to the appropriate funder.
“They will look poor in front of the merchant if they don’t really know the process,” Fein says.
Certainly, it’s a different ballgame for brokers when dealing with funders that are more human based versus more automated, says Taariq Lewis, chief executive and co-founder of Aquila Services Inc., a San Francisco-based company that offers merchants bank account cash flow analysis as well as funding that ranges from 70 days to 100 business days.
At Aquila, the process is meant to be totally automated so that brokers spend more time winning deals faster, with better data to do so. This means, however, that some of the underwriting requirements differ from some other industry players. Aquila’s most important requirement is that a merchant’s business is generally healthy and shows a positive history of sales deposits. Other funders require documents and background explanations, whereas Aquila strives to be completely data-driven, Lewis says. These types of distinctions can be important when submitting deals, funders say.
Stacking is another example of a key difference among funders that brokers need to understand. It’s a controversial practice; some funders are open to stacking, while others will only take up to a second or third position; a number of funders shy away from the practice completely. Brokers shouldn’t waste their time sending deals if there’s no chance a funder will take it; they have to do their research upfront, funders say.
Most times, brokers “don’t invest enough time to understand the process,” Fein says.
Some brokers may feel competitive pressure to sign up with as many funders as possible, but it can easily become unwieldy if the list is too long, funders say. Better, they say, to deal with only a handful of funders and truly understand what each of them is looking for.
“There are brokers that deal with 20 [funders], but I don’t think it’s a good, efficient practice,” says Rory Marks, co-founder and managing partner of Central Diligence Group, a New York funder that provides working capital for small businesses.
He suggests brokers select funders that are easy to work with and responsive to their phone calls and emails. Not all funders will pick up the phone to speak with brokers who have questions, but he believes his type of service is paramount, he says. “It’s something we do all the time,” he says.
He also recommends brokers consider a funder’s speed and efficiency of funding as well as document requirements and their individual specialties. There are plenty of funders to choose from, so brokers shouldn’t feel they have to work with those that are more difficult, he says.
To prevent a broker’s list from becoming too unwieldy, Gallagher of CFG Merchant Solutions suggests brokers have two to three go-to funders in each category of paper from the highest quality down to the lowest. Having a few options in each bucket allows greater flexibility in case one funder changes its parameters for deals, he says.
Brokers “sometimes just shotgun things and throw things against the wall and hope they stick,” Gallagher says. Instead, he and other funders advocate a more precise approach –proactively deciding where to send files based on what they know about the merchant and research they’ve done on prospective funders.
It used to be that when sending files to funders, brokers would provide some background on the company in the body of the email. This was helpful because even a few sentences can help funders gain some perspective about the company and better understand their funding needs, says Fein of Greenbox Capital.
These days, however, Fein says he’s getting more emails from brokers that simply request the maximum funding offer, without providing important details about the business. The financials on ABC importing company aren’t necessarily going to tell the whole story because funders won’t know what products they import and why the business is so successful and needs money to grow. Providing these types of details could help sway the underwriting process in a merchant’s favor. Brokers don’t have to say a lot, but funders appreciate having some meaty details. “A few sentences go a long way,” Fein says.
Many brokers make the mistake of overpromising what they can get for merchants and how long the process could take, funders say. Both can cause significant angst between merchants and brokers and between brokers and funders.
If a company is doing $15k in sales volume and asking for $50k in funding, the broker should know off the bat, the merchant is not going to get what he wants, says Marks of Central Diligence Group. By managing merchant’s expectations, brokers are doing their clients—and themselves—a favor. Why waste time on deals that won’t fund because they are fighting an uphill battle? Brokers shouldn’t knowingly put themselves in the position of having to backtrack later, Marks says.
Instead, explain to the merchant ahead of time he’s likely to receive a smaller amount than he’d hoped for. To show him why, walk the merchant through a general cash flow analysis using data from the past three to four months, says Gallagher of CFG Merchant Solutions. This will help merchants understand the process better, and it can help raise a broker’s conversion rate, he says.
“It’s about setting realistic expectations,” Marks says.
Sometimes brokers take only a cursory look at a merchant’s financials, and because of this, they overlook important details that can delay, significantly alter, or sink the underwriting process, funders say.
Heather Francis, founder and chief executive of Elevate Funding in Gainesville, Fla., offers the hypothetical example of a merchant who has total deposits of $80k in his bank account. On its face, it may look like a solid deal and the broker may make certain assurances to the merchant. But if it comes out during underwriting that most of the deposits are transfers from a personal savings account as opposed to sales, there can be trouble. Based on the situation, the merchant may only be eligible for $30k, but yet the owner is expecting to receive $80k based on his discussions with the broker. Now you have an unhappy merchant, a frustrated broker and a funder who may be blamed by the merchant, even though it’s really the broker who should have dug deeper in the first place and then managed the merchant’s expectations accordingly. “We see that a lot,” says Francis.
To get the most favorable deals for merchants, some brokers only present the rosiest of information in the hopes that the funder won’t discover anything’s amiss. Several panelists expressed frustration with brokers who purposely withhold information, saying it puts deals at risk and makes the process much less efficient for everyone.
Marks of Central Diligence Group offers the hypothetical example of a merchant whose sales volume dipped in two of the past six months. To push the deal through, a broker might submit only four months of data, hoping the funder doesn’t ask about the other two months. Some funders might accept only four statements, but other shops will want to see six. If a funder then asks for six, the broker’s omission creates unnecessary friction, he says.
Funders say it’s better to be upfront and disclose relevant information such as sales dips or some other type of temporary setback that weighs a merchant’s financials. Kept hidden, even small details could easily become game-changers—or deal-breakers—a losing proposition for merchants, brokers and funders alike.
“If we have the full story upfront and we’re going in eyes wide open, we can look at the file in a little bit of a different way,” says Gallagher of CFG Merchant Solutions.Last modified: August 12, 2018