The Road Back to Residual Commissions
“We’re still getting resids from a company 14 years later.” That’s what Phil Dushey said about a factoring client he has at Global Financial Services, a New York-based financial brokerage firm he founded.
He was speaking at deBanked’s “Broker Fair” to a room filled mostly with MCA brokers. Years ago, in the early stages of the merchant cash advance industry, brokers would earn residual payments from credit card processing companies when the merchants were converted from one merchant account to another to make the advance possible. Brokers also got residuals from MCA funders that would pay them over time as the merchant paid back.
Now that MCA companies rarely ever rely on credit processors and since they started to offer brokers their entire commission upfront, the concept of residual payments for MCA brokers became history. But for MCA brokers interested in broadening their product offering, residuals can resurface as a revenue stream if they embrace factoring.
Dushey later conceded that residuals from a factoring client lasting 14 years is highly unusual. What is common, though, is to get residuals that last four to five years, he said.
Ed DeAngelis, founder of Amerifi, a brokerage of 12 in Pennsylvania, said that brokers’ residual payments can be anywhere from 8% to 15% of what the factor collects from the merchant. He presented what he said was a realistic example of a merchant factoring a $100,000 invoice. The factor might typically take a 2% factoring fee, or $2,000. And the broker might take 10% of that amount, or $200, for every month that the invoice is outstanding.
“It’s a steady drip that makes a puddle,” DeAngelis said.
Of course, for a larger invoice, like for $500,000, the broker would get $1,000 a month, as long as the client keeps factoring. But DeAngelis said that most factoring companies have a one year agreement and that most clients stay with their factoring company for two to three years. And some, like Dushey’s client, stay for as many as 15 years. Since DeAngelis opened his brokerage two years ago, he said that all of his factoring clients are still in their agreements.
Eyal Lifshitz, CEO of BlueVine, one of the larger factoring companies, said that MCA brokering definitely pays more upfront, whereas factoring is more about building a book of business.
“There are factoring brokers that make quite a lot, but I would say they probably focus on larger deals,” Lifshitz said.
Lifshitz wouldn’t disclose the average size of a BlueVine factoring deal, but his estimation was that the industry average was $250,000 to $500,000.
“What we’re trying to build is a 20 to 30 year sustainable business,” DeAngelis said. “…So we’re trying to build those small residuals because five years from now, who knows? With regulations [in] cash advance, it may not be around. We’re already diversifying our portfolio with all these other traditional products so we’re not cash advance dependent.”
Not all brokers of factoring deals make residuals, according to Frank Capozza, founder of LiquidFSI, which provides factoring services to doctors offices. He said that he works with select brokers and they generally don’t get residual payments from his company. Instead, he pays them an origination fee.
Still, it seems more common for brokers of factoring deals to receive residuals. But it might not be for everyone.
For MCA brokers interested in also offering factoring, Lifshitz said: “They need to understand the product and what merchant could fit the criteria. It is more complex to understand than MCAs in my opinion.”Last modified: May 17, 2019
Todd Stone is a reporter for deBanked.