How Everybody Suddenly Became a Direct Funder

May 8, 2024 | By: Sean Murray

direct funders It’s hard to distinguish a broker from a funder these days especially in an environment where seemingly reliable evidence might not indicate what you think it does. For instance, I recently made an off-the-cuff post about “white label funding” on social media that opened up a lot of eyeballs to a practice that’s been happening behind the scenes for years that could totally change what you think you know about the business, and help explain why deals might be spreading further beyond what a broker intended. For instance, the catchphrase “of course we’re direct, just check our lawsuits out in the courts,” cannot be relied upon to indicate one is direct at all. Say what!

Here’s how white labeling came about, what it means (roughly speaking), and how it works. Please note there are certainly many iterations and variations to it:

More than ten years ago, the MCA arms race to recruit ISOs became ultra competitive and everyone began looking for an edge. Some tried high commissions or faster approvals or higher risk funding or customer service and so on and so forth. Others got more creative, turn the ISOs themselves into funders and leverage their incredible abilities to sell themselves! If a broker was called Cool Funding Co, then the funder might organize an LLC or register a DBA with an extremely close spelling, like Cool Funding Capital, LLC or Cool Funds Co, Inc, something that otherwise wouldn’t raise any eyebrows if one was dealing with Cool Funding Co. The real Cool Funding Co, white label entity in hand from a funder, could now market itself as “direct” and take to the interwebs and telephones to solicit deals from fellow brokers. When Cool Funding Co would get the deal, they would direct it to the real funder, who then prepares a contract with the white labeled name that looks very much like Cool Funding Co. Cool Funding Co gets a cut of every deal funded and also the honorary and distinguished advantage of being a funder in a market full of brokers! They can even syndicate on them which perhaps makes it look and feel even more direct!

Thus kicked off an extraordinary boom of white labeling, which carries through from beginning to end. If a deal defaults under the Cool Funding Capital, LLC contract, then that’s the name that will appear as a plaintiff in the court system. Hence, court records can be misleading to an outside observer who aren’t aware of this practice. You might be dealing with Cool Funding Co, but Cool Funding Capital is actually another funder entirely who actually did the deal behind the scenes.

Not content to let just one funder dominate this market, dozens of funders followed by offering white label services to brokers to front as a funder. This would allow brokers to shop a deal around to all those they have a white label relationship with and create the appearance that whomever approved it was actually them in the end. For a time, not offering white labeling was considered a major disadvantage because then brokers would have to reveal some other company’s name on the contract, risking the possibility that whichever broker they had solicited would cut them out of the process in the future and go truly direct.

The only tell would be that suddenly Cool Funding Co sure seemed to have a lot of legal names, like Cool Funding Capital, Cool Funding Two, Cool Merchant Funding, Cool Cap, and more, both on their contracts and in the court system, all indications but not necessarily definitive proof of white labeling. And not to say that any of this is deceptive or bad or immoral. White labeling exists in many industries and at the end of the day it allowed really good sales people to capitalize on the relationships with people who already liked them. It was smart, genius even. And if the deals get funded and everyone is happy, who cares?

Even some funders got in on it too, shopping out their declines to other funders only to put out a contract in front of their broker with a white label, leaving them to have no idea that someone else is actually doing the deal. Again, this isn’t necessarily deceptive, and can easily be marketed as a benefit. Instead of a broker having to waste time submitting a deal to five funders, they can submit to just one that they really like and the funder will get it done whether on their own balance sheet, through syndication, or through a white label somewhere else. The broker will only have to deal with that one relationship. The deals get done. Everybody wins.

The ironic thing is that white labeling became such a common feature that few people even talk about it anymore. White labeling can even be done in-house in which a funder today can just be a composite of several different syndication funds all while being white labeled under one marketable brand name. The point is that determining who is direct is not easily determined, and especially not from “looking someone up in the courts.” If there is one solid takeaway from this information its to be informed about what is possible and to help you ask better questions with potential relationship partners.

Ask questions things like these:

Do you rely on white labeled contracts?
Do you rely on syndication? If so, from who, where?
How many of your own underwriters do you have? Can I speak to them?
How much of your own money do you put in the deal?
If I look up the legal entity on your funding contract, who will show as the owner?

Red flags for a possible white label or broker:

Says they can fund any and every type of deal
Multiple commission structures
Relies entirely on statements like “look me up in the courts” for authenticity

And there you have it. Be careful out there. A great way to cut through the nonsense is to get to know your relationships in person! There are also plenty of funders who don’t white label at all because they don’t want to deal with any of the risk or complexities that come with it.

Last modified: May 8, 2024