John Tucker is Managing Member of 1st Capital Loans LLC, as well as an M.B.A. graduate and holder of three bachelor's degrees in Accounting, Business Management and Journalism. Tucker has nearly 9 years of professional experience in Commercial Finance and B2B Sales. Connect with Tucker on LinkedIn by clicking (here), or contact Tucker at Tucker@1stCapitalLoans.com or at 586-480-2140. Articles by John Tucker
The Broker’s Future: Are The Good Times Over?
June 1, 2015
As we continue the Year Of The Broker discussion, we must take an honest look at The Future. Due to the low barrier to entry into our space, there isn’t a week that goes by that I don’t see another recruiting ad informing the reader that all they need is a heartbeat, a UCC list, and an industry list of SIC Codes to make big money in our space. But is everything really as rosey as promoted, or if you are a new broker, should you consider investing your capital (time, energy, money and mental health) in another industry?
The Past
To understand The Future, sometimes we have to look at The Past. Instead of a year of the broker, there was instead an actual era of the Broker, and that was from 2000 to about 2013:
(( 2000 – 2007 ))
Few firms offered a “Merchant Cash Advance” as either a direct sell or value add, and very few merchants were receiving telephone solicitations in regards to the having “working capital” other than those involved in the Equipment Leasing or A/R Factoring sectors. While the market was wide open, most merchants wouldn’t entertain an advance for 6 months with a 1.25 – 1.30 factor rate when banks were lending pretty well at much lower borrowing costs.
(( 2008 to 2013 ))
When the economy and markets took a downturn in 2008 creating The Great Recession, and banks halted most of their lending to small business applicants, the Merchant Cash Advance product was more aggressively sold by the pioneers of the industry through their Merchant Processing ISO relationships, direct selling, online advertisements, and more. The pioneers also introduced risk based pricing and premium priced products, allowing them to appeal to the higher credit graded merchants who were finally entertaining the product due to banks not lending as efficiently as previously. The pioneers also introduced multiple formats of repayment including through ACH, which allowed them to service merchants that they couldn’t tie the repayment to their merchant processing volume due to the merchant’s inability to switch or the merchant’s low monthly processing volume.
Awareness of the Merchant Cash Advance skyrocketed, hundreds of millions in equity capital began pouring in, major media outlets such as CNBC gave the product coverage, and annually the industry was funding over $1 Billion to small business applicants.
This boom period also started the trend of new lenders and brokers popping into the industry overnight using mainly the same marketing strategies such as UCC Lists, SEO, PPC, Bankcard Portfolio Marketing, and Cold Calling Various SIC Codes. These strategies worked in a decent fashion until the flood of new direct lenders and brokers coming into the industry continued, with these new entrants using mainly the same strategies. Profits were being driven down, new client acquisitions were being driven down, and because a funder’s UCC filings were being called so much, they decided to begin filing them under fake names or only filing them on riskier merchants, or never filing a UCC at all. Also most of the Online Marketing methods became too expensive, pricing the little guy out of the market.
The Future
Now we are in 2015 and new broker entrants are mainly using the exact same strategies from 2008 – 2013, discovering that UCC lists and Cold Calling SIC Codes just will not work efficiently going forward. The Future of profitability and new client acquisition in our space is going to be through Strategic Partnerships. There are three sections of your Strategic Partnerships and they are your Professional Network, Mom and Pop Network, and Online Network.
• Professional Network – The creation of a professional network from referrals such as Banks, Credit Unions, Accountants, Business Brokers, Merchant Processing ISOs, etc., to bring in a high amount of consistent leads of small business applicants who are currently seeking capital.
• Mom and Pop Network – The creation of an external independent broker channel that includes hundreds of random brokers that you sign up to resell your services. You would use the same tongue and cheek, everything is rosey, recruiting ads that I see every week just to get a rush of people on the telephone making cold calls to SIC codes, trying to compete in online marketing, or calling the remains of UCC lists, all with the dream of making a lucrative payday. The volume produced on an individualized basis will be so small it’s irrelevant, but as a collective, they will make up a major chunk of volume. This why I call these sources Mom and Pop.
• Online Network – This is your SEO, PPC, High Traffic Website Ads, and other online advertising methods. These methods will become more expensive going forward and only those with large marketing budgets will be able to truly capitalize in this area with positioning, listings, etc.
Summary
Our space is changing and new broker entrants might want to reconsider investing their capital (time, energy, money and mental health) into this venture. Only direct lenders with team members that were pioneers of this space as well as with the right networks and equity sources, are capable of truly seizing The Future. Those just now trying to come in and ride the wave will soon discover that just like with the Stock Market, the real money has already been made and most of the future returns are already capitalized. As a new broker, you more than likely will fall into that dreaded Mom and Pop category, which isn’t a good position to be in for The Future.
Broker Business Planning – Selecting the Right Lenders
May 10, 2015Continuing The “Year of the Broker” Discussion
2015 is certainly the “Year of the Broker,” as the low barrier to entry into our space, in conjunction with various recruiting advertisements promising lucrative pastures, is attracting a variety of individuals with various levels of professional backgrounds. Some entrants have prior experience as a mortgage broker, insurance agent or banking specialist, while others are less familiar with professional sales and are under the belief that our space welcomes a lucrative introduction. Nevertheless, I believe that new broker entrants must be reminded that this is an entrepreneurial pursuit, rather than a get rich quick procedure, and efficient business planning will play a major part in the success or failure of your venture. A part of this efficient business planning, other than the basics of good resources for accounting, legal, marketing, market research, and financing, is the strategic selection of your lender partnerships. The right partnerships will grow, develop and sustain your business, but the wrong partnerships could add your entrepreneurial pursuit to the list of business startup failures.
The selection of your lender partnerships will depend on your unique value proposition (UVP). No entrepreneur should begin a pursuit without a well-defined UVP, for your UVP is the foundation of all of your business planning and return on investment forecasts. Your UVP should answer this question:
Understanding my market segment, what is it specifically that I will bring to the segment that isn’t already being provided by the current crop of solution providers?
The question includes three main components that must be addressed:
- The identification of a market segment
- The characteristics of all services within your industry, being sold to that market
- The services that you will uniquely provide to said market and their unique characteristics
Once your UVP is set, now it’s time to look into the selection of your Lender Partnerships.
To begin, let’s say that you decide to come into the industry and target start-up retail/restaurant businesses, that is, those with less than 1 year in operation. Because you are selling working capital solutions, you would research all available working capital options to this market segment which include sources such as nonprofit loans, business credit cards, personal savings, loans from retirement accounts, friends and family, equipment leasing, and merchant cash advances. To serve this market segment efficiently, you would choose to offer merchant cash advances and equipment leasing.
Next, you would scroll through all of the direct lending sources in the country that provide the working capital solution you have decided to lead with, but who also specialize or at least “serve” the target market you are seeking. Many equipment leasing companies do not fund businesses with less than 2 years in business, and many cash advance companies do not fund companies with less than 1 year in business. Your goal would be to find these lenders and create that network, negotiate pricing, workout your commission schedules, and verify all aspects of said partnership to make sure that it’s beneficial for your clients and your office. It should be a win-win-win partnership, a win for your clients as they find a source for working capital that they didn’t know existed, a win for your partner as they obtain “feet on the street (or telephone)” reps without having to pay their overhead, and a win for your office as you are allowed to serve your market and be paid well in doing so.
Due Diligence Is Key
When finalizing your lender selections, make sure all forms of due diligence are completed on the lender(s) to verify their credibility and competency. These forms of research include all of the following:
(( Structure and Legality ))
- The lender should be a licensed direct lender (in states where necessary).
- The lender shouldn’t be a start-up, but instead a proven entity with at least 2 years of operation.
- The lender should have at least directly funded volume in the eight digits (over $10,000,000).
- The lender should have a full staff of employees rather than just one person.
- The lender’s customer service and support departments should be easy to reach.
- The lender should have some sort of press or news media releases on its establishment.
- The lender should specify if they are going to do advances or loans or both.
- The lender’s funding agreements should specify if the transaction will be an advance or loan.
(( Online Presence ))
- The lender should have a fully functional business website, registered for at least two years.
- The lender should have a business email from their business website domain.
- The lender should be BBB Accredited (www.BBB.org) with at least an A rating.
- The lender should be a part of business associations with logo(s) displayed on their website.
- The lender should be included on basic online business directory listings.
(( Broker Respect ))
- The lender should provide a comprehensive Broker Agreement full of legal provisions.
- The lender’s Broker Agreement should spell out all provisions of the relationship.
- The lender’s Broker Agreement should spell out any quotas.
- The lender’s Broker Agreement should spell out new/renewal deal commission structure.
This is a rough introduction and surely there are other criterion that are important in selecting your lender partnerships. However, these recommendations will surely give you a head start as you head into one of the most competitive industries in financial services.
