For ISOs Only — How To Develop Your Factoring Brokerage Business (Part 3)

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!

Gerald C Watson is a Financial Intermediary specializing in arranging Contract and Working Capital Financing for growing firms throughout the country, for over the past 20 years.

Gerald has spoken on numerous panels and conducted seminars on Contract Financing within the public and private sector, written numerous articles and published a workbook on Contract Financing, and provided testimony on the subject of Contract Financing before the United States Commission on Minority Business in Washington, DC.

He has served on numerous Board of Directors, including the Commercial Finance Association (CFA), the St John's River Community College, and has also been a recipient of the SBA Business Advocate of the Year Award, and is a member of the International Factoring Association (IFA).

Gerald holds a Bachelor of Science in Business Administration from Babson College in Wellesley, Massachusetts, and a Master of Science in Business from the Management Education Institute in Cambridge, Massachusetts, where he graduated third in his class with Honors. Connect with him on LinkedIn or email him here