How many positions is too many positions for emergent?
That's the whole thing. It's a broad question. How many positions is
too many positions for a merchants?
Okay, that's a loaded multi part. Answer.
I feel like okay if I'm
winning. This is part of the bigger. Okay a thread
on The Daily Fender. But yeah, I
think that's the main question that we got out of that and I
think it'd be a great question to to discuss. Okay. How
many positions is too many positions for merchant?
Okay, so let's back up.
You know, what is the position is essentially it could
be alone. It could be an advanced that
you have and every layer that you take every additional
one that you take is considered another position right
and traditional Finance. The first position
has first right to the collateral. The second
position is next in line Beyond, you know behind the
first position to foreclosed on collateral if there's
some type of problem and and so on and so forth you have
you know, the third the fourth or whatever it doesn't usually
go that down that far but from what we've
seen in the non-bank small business finance space you
get these complex arrangements or Merchants
have taken.
very very many
products from various sources all the same
time. We'll literally have read about them having
10 12, you
know 15
Positions at once right? And these
are not necessarily traditional type financing Arrangement
Arrangements where there's collateral they might be
unsecured.
So if we're talking about those how many
positions is too many I think a long
time ago we used to say anything more than one was too many. Yeah, and the
reasoning was that the original underwriter on
the first one analyze what the
business could sustain and gave them
something accordingly. Yeah, right and like this
is the most they can sustain to be healthy.
While you know while being on track with the one that we gave them
and then when second company came along and said, well,
I think they could use a little bit more they need it and you'd
have the first one to be all upset. No, no, they can't
handle that. They can't handle it. But lo and
behold the world accepted that you could have two. Yeah, and then the world
accepted that you could have three and then World accepted that you could have
four or five and so on and so forth. And for those who are there in
the beginning it became like how can you know what is happening? Yeah
right now right overload. It's over versus this
one. Now. You can have 13. Yeah, and what's what's
become so tricky is that the first company potentially
already looked at that business
as this is the absolute most that they
could handle right if they're if any
more is being used to pay loans or
being taken to you know for a
receivable purchase to go somewhere else. They won't be able
to sustain it and when they find out they've taken all the additional ones are
saying this isn't fair to me at
First person to provide that to provide them Capital because
for me it's now too many positions because
now my original my Merchant has way more risk to
me than they did but from the merchants standpoint,
I think that's where we really should be looking how many positions is
too many for the merchant and that really all comes
down to honestly just if you had to give a single
sentence answer. It's
What they can afford. Yeah, how many
positions there's too many positions one in which they cannot afford.
Is too many right? And so that's
obviously a judgment that the business itself will
have to make it's a business. It's a judgment
that the funding companies will have to make we do
see advertisements for people offering 10, 11,
12 13 14 15 positions.
Long time ago this would have been unfathomable unfathomable to
me. Yeah, but we also have to recognize that
there are various products in
the market. Some are offering very small amounts, right? If
a merchant got a hundred grand the first time and somebody
else comes in and give them five and someone else comes in gives
them another five. Yes, they have three positions, but
the other two are very small. What's the added risk
to the first one right or even to the merchant itself? So
you have to weigh all these different factors. I know some people
will probably get mad and say no show on the answer is this right? But
I also think to kind of go to your
point. Every business is gonna be different they're gonna
be able to afford whatever they can afford, you know, and
they're gonna function a certain way. So I think to go
to your point it's very much true because I feel
what I've observed in the past is that sometimes there's
a lot of comparison like oh if so and so as
ten then we should have 10 and we have as well but behind closed doors,
we don't know what the other person
Doing we don't know what they're going through. We don't know how much they can afford. So, you
know, I think comparing and having
an exact number is gonna be very different versus,
you know, I mean having exact number
and trying to use that number as a standard. It's gonna be
different for everyone because at the end of the day, like you said it
just a matter of what you could afford and how your business runs.
And I think this is a great time for Underwriters
to pay attention to something because if
you have a merchant that's taken many many
positions. You need to be very very careful about
how you calculate their monthly average revenue
be sure not to calculate deposits from
competitors as Revenue. That is
not Revenue. So the business looks like it's doing
a hundred grand a month in revenue and 80,000 of
it was deposits from competitors. Well,
then that $80,000 should be removed from
your calculation. And when you remove that
from the calculation, you may find that they
don't qualify for whatever level position you're entertaining.
So be very careful when you
analyze bank statements to make sure that what you're looking at is revenue. We
have seen examples of
Deals that ended up in the court system where Underwriters I
don't know if they were new. I don't know what it was but it
turns out they did not think to discard
certain figures from the
totals and what happened that judged the
business based upon deposits from competitors as Revenue
extended way more than they should have to the
business. It's jeopardize themselves and the business
probably did not benefit from it. It ended up in bankruptcy court
with a lot of people asking a whole lot of questions about why did
you buy your future revenues if they didn't have really any
revenues and you're like I thought they did they had a hundred grand in deposits and
you're like, yeah, but that wasn't Revenue it was deposit from all their
competitors.
What were you thinking?
If you're a brand new underwriter, you need to look very closely at
the bank statements the bank data, whatever it
is, whatever type of data you get access to in your
job to make sure you understand the classification of
the deposits that you're looking
at. If it's a if it's a competitors deposit, that's
not Revenue throw it out then decide
if that business can handle it.
But also you should take into account that some
funding companies might consider it a breach of contract. If
you give funds to that customer you
might say you know what this is the deal
I would take on this is the risk I would take on I'm gonna
do it you could potentially in Peril that
business who had already agreed with
the previous funding company that they would not take any additional
funds from anyone else you could
end up putting them in a breach of contract almost inadvertently. Hopefully
not intentionally, right, but there's
a lot of things you have to keep in mind. You can't just go out.
There and throw money out there and not look at the bank statements and not consider who
they have money from from other people.
You will run into this circumstance with traditional
lenders where as new company
comes in. They look at
oh, they don't have any MCAS. They have some,
you know, weird bank loan or something. You know,
I don't care about that. Here's my product and the
merchant ends up in bankruptcy or something and you're like, okay, I got
to get my cut and the bank is like get out of the way. We were a
true first position. Yeah, literally move out of the way. You're
nobody. Yeah, and you're like, oh what you know, what do you mean I gotta
I got to get paid I fun to them and the bank
is like we literally have this blanket lean perfected. You
know, you see you're nobody
to us, you all need to pay attention to traditional Finance
products that these companies have as well.
You should not be blindly. This is I don't know why we got
all into this topic, but the question you ask was so broad. Yeah how many
positions there's too many. So let's just talk about all the different types of positions if
they have positions from True commercial
finance companies you got
Consider what the implications are if you fund behind
them what could happen to the money that you have
invested into that Merchant because you may find that
those who funded before you let money before you might have
a superior claim if anything goes wrong or
my complain about you giving that client money when you
weren't supposed to or you put them in a breach of contract.
I know this is a long drawn out answer right but you
have to use underwriting judgment.
When you're deciding if this position to
this Merchant makes sense.
That's my essay.