Late last week the New York State legislature voted to pass A10118A/S5470B, a bill that might lead to greater clarity and consumer knowledge according to Scott Stewart, CEO of the Innovative Lending Platform Association, a trade association of small business lenders.
Referring to it as “our model disclosure legislation,” Stewart explained in a phone call the work that the ILPA put in to help the bill through as well as what sort of impacts can be expected from S5470B.
“The implications are that small businesses, certainly in New York to begin with, but we think throughout the country, will have the opportunity to really see, understand, and compare various different sources and products for financing their small businesses in terms of their expansion and success. That’s something we’re very proud of and I think that’s something the small business borrower really deserves to see. They deserve to see and understand exactly what they’re doing and when they’re taking out financing products for their businesses.”
What exactly these business owners will understand better relates to the details of the bill, which requires small business financing contracts to disclose the annual percentage rate as well as other uniform disclosures. If signed by New York Governor Cuomo, the bill could have ramifications on small business lenders, MCA, and factoring providers.
ILPA, founded in 2016 and comprised by the likes of Kabbage, OnDeck, and BlueVine; worked alongside legislators to help with the drafting of the bill, assisting with the wording so that it reflects their own SMART Box initiative. This being a form offered by ILPA which lists a number of metrics worth considering when seeking small business financing.
“In January 2019, our team came together and decided that it made sense in the wake of 1235 in California to take a proactive approach to codify SMART Box as legislation in a state, and we selected New York because we felt we had a favorable legislature there,” Stewart said. “I think it’s an incredible achievement. You see the big margins that it passed by in both the Assembly and the Senate and we’re very, very proud of that. I think it really speaks to our cooperative approach to building legislation. And now, as we move toward the implementation phase, we’re going to be in a place where, hopefully in the next six months or so, small businesses will begin receiving really clear disclosures on the capital and credit that they’re trying to take out.”
As noted though, the bill must be signed by Governor Cuomo before becoming law, and then it will affect New York only. Beyond the Empire State though, Stewart is hopeful that ILPA will be able to implement the terms of S5470B in other states.
“Now that we have hopefully harmonized the legislative landscape between California, with 1235, and New York; hopefully we’ll be able to export that to other states. We don’t have any accurate plans at this time to do that, but we feel like if two of the larger states in the nation have very similar disclosure regimes then we’re on the track toward seeing this nationwide.”
New York State Legislature Passes Law That Requires APR Disclosure On Small Business Finance Contracts (Even If They’re Not Loans)July 24, 2020
Factoring companies and merchant cash advance providers may be in for a rude awakening in New York. The legislature there, in a matter of days, has rammed through a new law that requires APRs and other uniform disclosures be presented on commercial finance contracts… even if the agreements are not loans and even if one cannot be mathematically ascertained.
The law also makes New York’s Department of Financial Services (DFS) the overseer and regulatory authority of all such finance agreements. DFS can impose penalties for violations of the law, the language says.
The bill was passed through so quickly that unusual jargon remained in the final version, increasing the likelihood that there will be confusion during the roll-out. One such issue raised is the requirement that a capital provider disclose whether or not there is any “double dipping” going on in the transaction. The term led to a rather interesting debate on the Senate Floor where Senator George Borrello expounded that double dipping might be well understood at a party where potato chips are available but that it did not formally exist in finance and made little sense to have it written into law.
Senator Kevin Thomas, the senate sponsor of the bill, admitted that there was opposition to the “technicalities” of it by some industry groups like the Small Business Finance Association and that PayPal was one such particular company that had opposed it on that basis. Senator Borello raised the concern that a similar law had already been passed in California and that even with all of their best minds, the state regulatory authorities had been unable to come up with a mutually agreed upon way to calculate APR for products in which there is no absolute time-frame. Thomas, acknowledging that, hoped that DFS would be able to come up with their own math.
APR as defined under Federal “Regulation Z”, which the New York law points to for its definition, does not permit any room for imprecision. The issue calls to mind a consent order that an online consumer lender (LendUp) entered into with the Consumer Financial Protection Bureau in 2016 after the agency accused the lender of understating its APR by only 1/10th of 1%. The penalty to LendUp was $1.8 million.
Providers of small business loans, MCAs, factoring and other types of commercial financing in New York would probably be well advised to consult an attorney for a legal analysis and plan of action for compliance with this law. The governor still needs to sign the bill and New York’s DFS still has to prepare for its new oversight role.
Passage of the law was celebrated by Funding Circle on social media and retweeted by Assemblyman Ken Zebrowski who sponsored the bill. The Responsible Business Lending Coalition simultaneously published a statement.
The rush to submit your PPP application may be for naught if you own an ineligible business. The SBA prohibits loan guarantees to “businesses primarily engaged in lending, investments, or to an otherwise eligible business engaged in financing or factoring.” If there’s any confusion as to what that includes, the SBA lists 7 specific ineligible business types under this definition in the statutory code. They include:
- Life Insurance Companies (but not independent agents);
- Finance Companies
- Factoring Companies
- Investment Companies
- Bail Bond Companies
- Other businesses whose stock in trade is money
The PPP’s interim final rule refers to this statute as a rule for ineligibility as it applies to the PPP.
The statute does list a handful of businesses engaged in lending that may traditionally qualify for an exception. They are as follows:
- A pawn shop that provides financing is eligible if more than 50% of its revenue for the previous year was from the sale of merchandise rather than from interest on loans.
- A business that provides financing in the regular course of its business (such as a business that finances credit sales) is eligible, provided less than 50% of its revenue is from financing its sales.
- A mortgage servicing company that disburses loans and sells them within 14 calendar days of loan closing is eligible. Mortgage companies primarily engaged in the business of servicing loans are eligible. Mortgage companies that make loans and hold them in their portfolio are not eligible.
- A check cashing business is eligible if it receives more than 50% of its revenue from the service of cashing checks.
- A business engaged in providing the services of a financial advisor on a fee basis is eligible provided they do not use loan proceeds to invest in their own
deBanked is not a law firm. Consult a CPA or an attorney to provide better guidance on your company’s eligibility.
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!
In Part 2, we’re going to focus on 3 major areas:
(1) What is Factoring and How Does it Work?
(2) What Are the Costs?
(3) How Do You Qualify?
We’re also going to touch on HOW TO find factoring funders.
What is Factoring and How Does it Work?
Factoring actually dates back to 2000 BC but got going in the US during the 1600s when colonists sought “advance payments” on tobacco, cotton, etc., shipped across the Atlantic to England. Today, it’s a TRILLION DOLLAR INDUSTRY worldwide, involving commercial banks, asset-based lenders, Fintech companies, and private hedge funds all over the world. And a million years later the purpose of factoring is the same; speed up cash flow by leveraging receivables, while waiting to get paid.
In a nutshell, much like an MCA, factoring is an advance against “future invoice proceeds.”
However, unlike an MCA where the advance is largely based on bank statements, with factoring, advances are based on the number of confirmed invoices the merchant has outstanding with their approved B2B customers. The invoice(s), which is the asset, serves as COLLATERAL.
So, while an MCA funder “looks backwards” at bank statements to help determine eligible amount, the factoring funder “looks forward” to determine eligible amount based on approved invoices.
Factoring advance rates typically range from 70% to 90% of the invoice face value, and are based on volume, industry type, etc.
There are two major elements required for factoring to work. The first is the merchant must be doing business with a credit-worthy B2B customer. Approval isn’t based on the financial strength of the merchant, but on their customer, i.e. the company paying the bill.
The second major element is that, in addition to being credit-worthy, the customer must agree to send invoice payments DIRECTLY to the funder. This provides the funder with an assurance of payment and substantially reduces the risk of re-payment or default.
So, unlike an MCA where payment is on a daily or weekly basis, the factoring advance has NO PAYMENTS, and actually pays itself off once the invoice has been paid. The funder then deducts the advance along with their fee and wires the balance to the merchant.
With no payments and invoice proceeds automatically paying off the advance, I refer to this as a “SELF LIQUIDATING LOAN”. It’s also “ELASTIC”, which means the more confirmed invoices the merchant has outstanding, the more funding they are eligible to draw. It’s like having a revolving LOC with no payments………of course unless the customer doesn’t pay, right? Good question!
So, here’s the answer: There’s actually two types of factoring; (1) RECOURSE FACTORING, which means if a customer doesn’t pay the invoice, the Merchant is financially responsible for the advance, and (2) NON-RECOURSE FACTORING, which means they’re not.
Here’s the process in a nutshell: Merchant submits app and doc checklist for preliminary underwriting approval. Funder issues term sheet, and if accepted by Merchant, underwriting and due diligence is completed. A closing and funding docs package are submitted to the merchant, and upon execution, the funder is prepared to start confirming and funding invoices.
How long does it take from start to finish? Depends on how much hair there is on the file. A clean file can take as little as 5 to 7 business days. A file with a lot of hair can take much longer. We actually had a $13 million file funded in 48 hours! That guy was pretty happy and so was I. It was an acquisition with a deadline. So, here’s what to tell your merchants with regards to timing: “funding is not calendar-related, but event related”. In other words, once the required events are completed then funding can occur.”
What Are the Costs?
There are several major factors that determine cost, rate, terms. volume, invoice size and funding frequency, industry type, risk, etc. Every funder has their own respective rate and fee schedule. Some charge application/due diligence fees while others don’t. Some charge origination and/or admin fees, while others don’t.
Some funders base their pricing on APR, with rates as low as Prime + 3 to 5%, while others have all-in rates typically ranging from 1.5% to 3% per month. After the first 30 days, monthly rates are typically broken down in 10 or 15 day increments (pro-rating). As a result, the ACTUAL COST of factoring in dollars and cents, is based on the amount of time the advance is outstanding, from the funding date to the date the invoice payment is received by the funder.
Here’s an alternative perspective on cost: Factoring is like “renting money on a daily basis,” where the funder essentially takes “equity in the transaction” versus equity in the business. Comparing the bottom-line cost with the bottom-line benefits is the key. But at the end of the day, “the highest price you pay for money is the price you pay for the LACK of it”.
Just like with MCAs, make sure you understand the rate structure, terms, and fees charged by your factoring funder, and how to calculate the cost in dollars and cents as well.
How Do You Qualify?
Factoring approvals have 3 components: The first is the merchant. Again, every funder has their own approval criteria and document checklist. Some require minimal info, while others ask for EVERYTHING including a pint of blood. While most only require one month bank, approval is not based on deposits, or how well they manage their account. Remember their primary focus is on assessing the quality of the receivables, determining if they have sufficient gross profit margins, ensure they are in good standing, and address any “deal killers”, i.e. tax liens, judgments, or UCC filings in first position, which is where they need to be, in most cases. (We actually have funding partners who will factor in second and third positions)
The second factoring approval is the merchant’s customer(s), typically referred to as the debtor. This is determined by the funder who looks at things like D&B, PAYDEX Scores, and other proprietary industry databases. In some instances, a lack of secondary financial/credit information on the customer can be offset through their payment history with the merchant. In other instances, the funder may require bank and trade references if no history exists. Candidly speaking, best practices by the merchant says they should already be doing the same thing; i.e. credit qualifying their customers, whether they need funding or not, unless it’s a large, well established company or government agency. The fact is, extending terms to someone you don’t know can be risky because ‘all businesses may not be good businesses.’ Let’s face it, it’s all about getting paid, right?
Ever heard this horror story; “I need an MCA because I got burned by one of my customers who strung me out and never paid me!” Too bad. They should have picked up that $100 bill off the street! Just kidding!
The third factoring approval is on the deal itself, i.e. the purchase order or contract the merchant has with the debtor. There are over 15 different things the funder will look at to identify existing or potential funding issues. Here’s an example. I recently got a referral for a client who had 63 different purchase orders going to 63 different locations for the same large customer, but BEFORE he started shipping, half the orders had already passed the CANCELLATION DATE! What do you think the chances are of the deal being approved for funding? Don’t know yet. Will let you know when I get to part 3 of the series. Keep your fingers crossed and so will I.
Typical things the funder looks at are payment terms, default clauses, customer signature, offset clauses, just to name a few. If you’d like a complete list, just shoot me over an email.
How to Find Funders
Finding factoring funders is easy. Just google FACTORING and you’ll get a whole bunch. What’s NOT so easy is determining the “best fit” for YOUR merchant because one size does not fit all. Over the years, some of the biggest horror stories I’ve heard from both funders and clients was a relationship that went bad because it was not the best fit. But remember this; “just because you picked the wrong spouse doesn’t mean getting married is a bad idea.” Determining the best fit is one of the key functions for your factoring brokerage business.
Some funders you will find specialize by industry, i.e. transportation, medical, staffing, construction, while others don’t. Some can move quickly while others take two weeks. Some are more flexible than others. Some focus on A-credit Merchants and have the lower rates, while others work with start-ups. Always find out UPFRONT their approval criteria and constraints. Shoot over an email and I’ll send our list of the Top 10 Questions to Ask Before Selecting a Factoring Funder.
I’m the owner of The Watson Group, a factoring broker company.
How did you end up in the industry?
I got started in what I call the contract financing industry about 35 years ago, kind of by accident. I had spent years working with a large management consulting company in Boston and we had some major contracts in the DC area. I was on an assignment there and my son was in school there with another kid, and I met the parents and the dad told me what he was doing and he said I needed to come by the offices to check it out.
I really had no intention of going at all, but finally to get this guy off my back, I went by one day and he showed me the business they were in. When I left I was totally on board. I had been working for several years in management consulting, but this was all new and I was excited because it was helping real businesses solve real problems and it was very hands-on.
I came on board and I’ll never forget my first day on the job: I didn’t know anything from anything – rights, factoring, contracts financing – this was years before the MCA industry even existed, and my boss said he just got a job, 911 call from a printer and they needed some funding help. “Can you help them? Why don’t you come ride with me? It’d be good on the job training for you.” And so we sat down with the guy and found a solution for him. And to this day he hasn’t had to close his business.
How were those early days?
Interesting because this was before the internet, almost before cell phones, in fact. I remember at one point when I was being hired, the Motorola flip phone was just coming out and they were like $1,500 around 25 years ago. And I said okay, I’ll take the job but you’ve got to give me one of these Motorola phones, so he did and it was great but this is before the internet and I didn’t really believe in traditional advertising or mailing out brochures, so the strategy I take is called “institutional referral-based marketing.”
In a nutshell, what that is, is working with various institutions that refer clients to use on a regular basis and as part of that process, I’d give talks or seminars and workshops and sit on panels and teach some of these referral groups how to assess deals and package them and get them ready for funding. You know, develop a pretty solid reputation in the industry for what we did and even today we’re 100% referral.
What can you tell me of the style in which you approach deals?
The approach that I’ve always taken is really a diagnostic approach, we kind of almost see ourselves as doctors. If you go to a doctor and you have pain, you may not know what’s causing that pain, you just want to feel better. And so what does the doctor do? They have to understand what’s going on in order to make you feel better.
Client’s got a pain: “I need money. I need working capital and I need it now.” And so we get a clear picture of what their objectives are and what they’re looking to accomplish: how much they need, what they need it for, timing, etc., and like a doctor, we go through a series of diagnostic tests, which can involve getting a list of documents – financials, bank statements, whatever it is – and going through them. You’re drilling down on where they’re at and coming up after that, coming up with what I call a treatment plan or funding strategy.
Here’s the key: you’ve got to ask the right questions, because if you don’t ask the right questions you’ll never get the right answer. All too often what a broker will do is they’ll get right into solutions and answers and talk about why what they offer is the best or why their funder is the best thing since sliced bread without having a picture of what their client’s true needs are in this situation. So I have a whole series of quizzes I’ve done a million times so I don’t need to write them down. I know what they are but I systematically go through ‘em, and we call that a preliminary underwriting interview.
What is the value of combining MCAs and factoring?
Funding solutions typically involve multi-funding products. And that’s where the advent of MCAs came in, and why they’re such a real asset. Because you meet a client today and it’s Wednesday, or Tuesday, hell maybe even Thursday, and the guy’s siting there with half a million dollars in receivables that we can convert into cash but we may need 3 days to do it, but he needs 2 days.
MCAs are a great product because we can step in, solve the problem, get him an immediate injection to stop the bleeding, and take it out from factoring proceeds a few days later. So it’s a great compliment and tool and this is something I’ve tried to educate on both sides. It’s not a threat it’s a complement. The key is how you use it. It’s like two medications. You go to a doctor, they’ll prescribe a list of meds, the key is to make sure they all complement each other.
Any advice for those looking to combine MCAs and factoring?
The first thing you want to do as an ISO who’s interested in developing a factoring brokering business is to understand the basics of factoring: what is factoring, how does it work, how do you qualify, how much does it cost?
The second thing you want to do is look internally to develop your customer base and the quickest customer base is what we call the low-hanging fruit. These are existing merchants that didn’t fund. Any merchant that is in B2B, whether they got funded or not, is a candidate for factoring. So go back through the files, look at the database and you may find out you probably have a lot more than what you ever imagined.
The third is to develop your database of funding resources – of funders.
And the last thing you want to have is a game plan. What’s your game plan and what’s your strategy for moving forward with your factoring broker business?
Let me ask you a question; If you were walking down the street and saw a $100 bill on the sidewalk, would you stop and pick it up? Of course you would, unless you didn’t see it. Or would you say, “I’m in a hurry and it’s ONLY $100. I’ll make a lot more money on that big MCA deal I’m heading into the office to work on, so I’ll just leave it on the sidewalk.” Really?!
Well, Here’s a rude awakening. For any of you who haven’t added Factoring to your financing product mix, that’s EXACTLY what you’re doing RIGHT NOW! And get this, you’re doing it with some of the SAME merchants you’re doing deals with RIGHT NOW! Here’s why; A percentage of your merchants sell Business-To Business (B2B), and get paid in 30 to 45 days, and in some cases, even longer.
Many of these are the SAME merchants who come to YOU for an advance to help cash-flow due to delayed invoice payments, so you provide an MCA, right? Right! That’s what we do. But here’s the problem: Next month they come back again, and then again, and then sometimes they get wise, secure another position somewhere else, and before long, well, we all know the story. After all that, while the last advance may have solved their immediate problem, they will ALWAYS have a continuing and on-going need for cash because they’re ALWAYS waiting to get paid. And the FASTER they grow, the BIGGER the problem! Sound familiar?
So, what does that tell us? In most cases, while an MCA may help stop the bleeding, it’s not designed to heal the wound. More specifically, the “wound” that needs to be healed is the un-predictable timing of customer payments on outstanding invoices. So while an MCA provides immediate relief, factoring solves the timing problem. Here’s how it works: The factoring funder provides an advance against approved invoices, typically 70% to 90%. Once the invoice is paid, the funder deducts the advance, along with their fee, and wires the balance to the merchant. So the advance essentially pays itself off, working much like a revolving Line of Credit (LOC). In other words, no payments! The term I use to describe this is called Self-Liquidating.
Here’s how I see it: when structured properly, factoring and MCAs can often complement each other and work well together. Factoring provides predictable cash flow because advances are based on predictable billings to their customers, whether it be monthly, weekly, or even daily. The predictable cash-flow from factoring advances is what the merchant can rely on to cover their continuing and on-going business expenses, i.e. payroll, materials, etc. MCAs can also be used to provide a lump sum injection to cover interim cash needs on a short-term basis, while factoring is being put in place.
Here’s an actual example of a real client situation we recently funded using this approach. Client is a large importer of Spanish wines selling to one of the largest spirits distributors in the country. They typically get paid in 45 to 60 days, so we established a factoring facility, which would take about a week. However, they had a container from Spain that needed to be paid for and shipped IMMEDIATELY to help fill holiday orders. We secured an MCA to pay for the container and negotiated an aggressive early pay-off discount. Once the factoring LOC was in place, the MCA was satisfied using a portion of the proceeds from the first factoring advance. We are now putting a purchase order funding facility in place to cover the upfront costs on all future container shipments from overseas.
This combined approach, enables YOU to provide FUNDING SOLUTIONS for your merchants, much like Ed McKinley described in the September/October, 2019 issue of deBanked Magazine where he talks about Consultative Selling. A true professional focuses on solving financing problems and building a relationship with their merchants, versus simply funding a transaction. You then have the opportunity of becoming a “trusted financing resource” versus a broker simply interested in what I call “hit and run” selling. In addition, this approach can have a multiplier effect on your income, enabling you to get paid on a continuing and on-going basis.
Speaking of getting paid, you may ask, “So how much money can I make with factoring?”
I’m so glad you asked that question. Maybe now is a good time to introduce myself. For over the past 25 years, I have specialized in arranging factoring/PO and contract financing for hundreds of growing business owners all over the country, providing millions of dollars in financing. Over the years I have earned in excess of a seven-figure income, primarily as a broker. I’m sharing this information with you to make a point; there’s a LOT of money which YOU can make too with factoring, IN ADDITION TO what you’re already making with MCAs.
So, then you say, “Well that’s great for you Watson, but how much money can I make?” Good question. Let’s take a look at how it’s structured. With factoring, you’re paid by the funder, just like an MCA. Two major differences. The first is that broker commissions for factoring typically range between 10% to 15% of the fee income earned by the funder per month. Fee income is earned once the outstanding funded invoices have been paid by the merchant’s customers. Broker commissions are then paid by the funder the following month. As an example, if the fee income earned by the funder was, say, $10,000 per merchant, per month, you would be paid $1,000 to $1,500 per merchant, per month. Ten merchants would pay you $10,000 to $15,000 per month and so on. Broker commissions will continue to be paid for the life of the factoring relationship and provide you with residual income, or what many refer to as, mail-box money, because it’s actually like getting a renewal every month from the same merchants, and you don’t even have to get out of bed!
A second source of income which is OPTIONAL, is to establish a fee agreement with the client to pay a success fee or origination fee based on the size of the facility. It is a one-time fee paid at closing and funding, either from the first factoring advance or over several advances based on what you work out with your merchant. Success fees are much like points in a closing on a real estate loan and typically range from 1% to 5% of the facility size. The fee is paid to you directly by your merchant once they have been funded. It is designed to provide you with IMMEDIATE INCOME. As an example, a $250,000 facility at 2% will pay you $5,000 or $10,000 at 4%. And that’s just for one merchant. How many could you do per month? For large contracts, we’ve established factoring facilities up to $5 million. I’ll let you do the math to see the potential.
Combining these two income streams can potentially provide a significant increase to your existing MCA income base, and in some cases from your EXISTING book of merchants. These are what we refer to as the low hanging fruit. They include your construction contractors, service and supply companies, transportation, manufacturing, medical and professional services firms, or anyone else who invoices B2B. Some retail merchants also sell B2B, while others, like restaurants, may have catering contracts. Take a look through your files. For many of these merchants you are already asking for A/R Aging Schedules as a stip, right? Now that aging schedule takes on a whole new meaning! And if they’re not factoring now, my friends, THAT’s the $100 bill you “didn’t see” laying on the street, and potentially THOUSANDS more you are leaving on the table! To be sure, close the MCA they need right now, make the money, and set them up with Phase II by establishing a factoring facility on their behalf. Then continue to provide MCAs as needed to cover unexpected problems or take advantage of opportunities. Make sense?
The next article will be what I call Factoring 101 and will focus on 4 major areas: (1) What is Factoring? (2) How does it work? (3) What are the costs? and (4) How do you qualify? We will also talk about identifying and selecting potential factoring funders, HOW TO deal with UCC filing issues, Subordination Agreements, and Fee Agreements with your merchants. We will also touch on Purchase Order Funding as well.
The last article will be designed to bring it all together and talk about HOW TO establish a game plan and options for getting started with your factoring brokerage business and a few key tips on maximizing success in the business.
“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.”
“There were no factoring companies online when we started [in 2013],” said Eyal Lifshitz, CEO of BlueVine.
That may be true. Lifshitz has become a thought leader in the factoring world, known for creating a company, BlueVine, that introduced an online-only factoring product. When deBanked asked Lifshitz yesterday if he saw other factoring companies embracing technology, he was reluctant to speak about competitors. But he said, “We’re not seeing as much movement from traditional factoring companies…there have been some attempts of traditional factoring companies to move in [the technology] direction, but we haven’t seen something major happening.”
A leading U.S. factor attorney who asked not to be named, echoed this sentiment, albeit more forcefully.
“It’s painful how little change there has been among factors,” the lawyer said. “They have been comfortable for far too long.”
When asked if BlueVine is the only company in the factoring space that is technologically advanced, he said there is one other that comes to mind, and that is LSQ, based in Maitland, FL.
“They’ve always been ahead of the curve and early adopters of technology,” he said of LSQ. “They’re just more quiet about it than BlueVine.”
BlueVine very much identifies itself as a technology company first, according to Lifshitz.
“We started on day 1 as being 100 percent online, so it’s a different approach. A different DNA,” Lifshitz said.
While BlueVine started in 2013 offering only a factoring product, the company later introduced a line of credit product which now accounts for a little more than half of its business. Lifshitz noted that the flexibility of the line of credit product is very appealing to many of their clients.
With factoring, the customer can only get as much money as the customer has invoices for. But with the line of credit, the customer can get funds – up to $250,000 – advanced to them as they need it. So, increasingly, it’s the companies looking for amounts greater that $250,000 that will opt for BlueVine’s factoring product, Lifshitz said.
At the Money 20/20 conference at the end of October of this year, Lifshitz said that BlueVine will launch a third product in 2019, and possibly a fourth as well.
“We are focused on products that are hard to do,” Lifshitz said. “The magic is how to take a product that is complex to deliver from an underwriting standpoint, from an infrastructure standpoint, and from an automation standpoint, and deliver it to our small business customer in an [easy] way.”
Yesterday, the New York Institute of Credit (NYIC) hosted a conference in Manhattan with attendees from several segments of the commercial finance industry, including factoring, MCA, and asset based lending. Approximately 100 registrants gathered at Arno Ristorante in the garment district section of midtown. In addition to local New York firms, attendees travelled from as far as Chicago and California to be at the event.
“By all accounts, it was a big success,” said Harvey Gross, Executive Director of the NYIC, which recently celebrated its 100th anniversary. The half-day conference was a collaboration of the NYIC, the Alternative Finance Bar Association (AFBA), the IFA Northeast, and deBanked.
“The joint conference was truly groundbreaking,” said Lindsey Rohan, a cofounder of the AFBA, who also moderated a legal panel. “Having the various business models that make up the alternative finance space in the same room created an opportunity for honest and impactful conversation. While we only scratched the surface and I have many new questions, I’m confident that new business relationships were created and this will open the door to a continued exchange of ideas.”
Nineteen panelists, many of them executives at financial companies and lawyers, contributed to four panels that filled the afternoon with lively and thoughtful conversation. Regulations coming out of California and just recently from New Jersey, were hot topics of discussion.
deBanked founder Sean Murray moderated a panel on Best Practices. “These type of collaborative events are necessary as commercial finance offerings continue to expand. Education and debate create a more fluid marketplace,” Murray said.
Andrew Bertolina, whose company Finvoice offers factors and asset-based lenders a sleek software solution, said it was “great to see everyone at the Lending Conference and cross-pollination of MCA, factors and fintech players. Most cross-pollination at this IFA NYIC event than in prior factoring events.” Bertolina is the co-founder and CEO.
Robert Zadek, an attorney with Buchalter said, “that was a great meeting. It was so instructive to hear intelligent, honorable representatives of factoring and of alternative finance, who share clients and have overlapping products cordially comparing notes and sharing somewhat different views of the marketplace and the future of SMB financing. It is fascinating to see how much each can learn from the other, and to witness how such different financial products are moving towards each. The lesson – adapt or perish.”
The conference was sponsored by Change Capital, Finvoice, law firm Platzer, Swergold, Levine, Goldberg, Katz & Jaslow LLP, Aurous Financial, and Financial Poise.
Triumph Bancorp, Inc. (NASDAQ:TBK) recently announced the closing of the acquisition of the transportation factoring assets of Interstate Capital Corporation by Advance Business Capital, also known as Triumph Business Capital.
Triumph Business Capital is a wholly owned subsidiary of TBK Bank, SSB, which is a wholly owned subsidiary of Triumph Bancorp. The assets acquired include all of the accounts receivable and transportation factoring assets and operations of Interstate Capital Corporation (ICC) and certain of its affiliates. Following the closing [of ICC], the acquired operations will continue to be conducted under the ICC brand name.
Triumph initially announced its agreement to acquire the transportation factoring assets of ICC on April 9, 2018, but the acquisition was made final at the beginning of the month. Triumph Bancorp, Inc. is a financial holding company headquartered in Dallas, Texas, with a diversified line of community banking and commercial finance activities.