A single innocuous quote by one of this issue’s sources is all it took to put everything in perspective. “2015 is the year of the broker,” said Sendto’s Amanda Kingsley. Could that even be possible if 2014 was defined by algorithms?
In the pages that follow, we investigate the impact that the OnDeck and Lending Club IPOs had on public awareness but from a unique angle. Loan volumes are up everywhere you look, but so are the number of middlemen that are trying to get in on the action. The broker business is booming.
Even the lending platforms leading the technology charge could best be described as brokers. They connect borrowers with investors for a fee. So too could the investment bankers who have been tirelessly making the rounds to assist with capital raising.
But it was when a 25-year old college dropout told me that deal-making afforded him the ability to go from taking the bus to work to driving a new Ferrari, that I became convinced that 2015 might indeed be the year of the broker.
This isn’t to say that mistakes aren’t being made along the way. The influx of inexperienced newcomers has created a complicated environment.
I was a broker once too. When I launched MerchantProcessingResource.com (now deBanked) back in 2010, I was still making deals myself. Through the blog and publication, I try to cover the wider industry from an insider’s perspective. That often means rolling up my sleeves and experiencing it firsthand.
Just this past February we not only accepted a payment in bitcoin, but the agreed upon advertising price was actually set in bitcoin, not dollars. These are revolutionary times.
Many of the financial companies and systems we delve into might need banks, but they are not banks themselves. That is the essence of the industry we hope to capture. As technology improves, the world is becoming a little less banked. And so with that, hello again. I’m back. I’m excited. I’m deBanked.
I hope you enjoy this issue.
Have an opinion on which way the industry is headed? Or eager to read about events that you feel are most relevant? DailyFunder is running a preliminary research survey geared towards those involved in merchant cash advance and alternative business lending. It’s completely anonymous and it will be used to help steer the direction of DailyFunder, the only alternative business lending publication. That means we want to know how you think, what you think, and what you care about.
Collected responses already prove that industry insiders have a lot to say, especially in the write-in questions. So go and make sure your voice is heard. It’s anonymous and it’ll only take a minute or two.
Some of the statistical results may be published in the next issue of the magazine.
It’s one thing to assume how small businesses feel about Obamacare and another to hear it straight from the horse’s mouth. New York-based funding provider Merchant Cash and Capital surveyed their clients and this is what they learned:
- Nearly one third of respondents believe the Act will increase operational expenses.
- 40 percent aren’t sure how it will impact their business.
- One in four respondents said they will halt any growth initiatives in the near future as a result of the Act.
Infographic from MCC
Following a wild 18 months of press releases and technology revolutions, I’m hearing that some ISOs are having technology fatigue. VCs and Private Equity want to invest in companies that are automating everything, but that doesn’t necessarily mean account reps are ready for it. The worst fear an account rep has is using an automated system to spit out numbers with a contract, get that contract signed by the merchant, and then have the figures revised or nullified during a later human review. Going back to the merchant with a 2nd contract with new numbers (often times worse) is a major credibility killer for them. It has bait and switch written all over it, even if they’ve made perfectly clear to the merchant that the terms they sign for are subject to a final underwriting review.
This problem has existed for years but that pressure has really been amplified by the recent tech race. Some funders are doing pretty good with it. Others aren’t. There are plenty of account reps that can’t function in a world where the answer is always 1 or 0 regardless. MCA came of age because of the shades of grey. I used to work for a company that was famous for listening to every merchant’s “story.” That factor can’t get baked into an algorithm.
As you might or might not suspect, there are funders thriving simply because they aren’t heavily tech oriented. ISOs get to talk to a human, negotiate the terms with an underwriter, and get exceptions that algorithms are programmed to disallow. When the algorithm says the deal is approved for a maximum of $10,000 and your merchant gets an offer from a competitor for $12,000, you’re going to need to get a human involved to match it. And if you’re a company that simply won’t bend your limits in situations like that, then that ISO isn’t going to send you deals in the first place.
Not everyone in the merchant cash advance business is convinced about automation. Then again, it’s not easy to convince people in this business about many things:
So what’s your criteria again???
We all know this guy
So it’s not actually approved then…
Oh really? What’s this ISO’s name?
As an account rep, I once had a funder make me get six re-signed contracts. Each time I got it re-signed, they decided they weren’t comfortable and revised the offer down. The final advance amount was more than 80% lower than the original approved amount. Streetz is rough.
Being my first post in the Small Business Corner, allow me to introduce myself. My name is Steve Ontiveros and I’m the founder of The Factoring Place. I’m good at finding the right factoring company for my clients based on their unique situations. Factoring and MCA really aren’t that different. Each company seeking a merchant cash advance is unique, like each factoring client is unique. Not all merchant cash advance companies are alike, and similarly not all factoring companies offer the same program & factoring rate. I became a factoring broker because I wanted to make sure my clients were getting the very best factoring deal for their unique situation.
Many factors lack the c-c-c-courage needed to fund a construction deal. Preliminary & Mechanic’s Liens, Payment & Performance Bonds, Progress Billing, and Retention, OH MY! Follow me along the “Yellow Brick Road” to mitigate the common risks of factoring construction deals.y factoring and merchant cash advance brokers turn down or walk away from construction companies seeking working capital. Factoring construction companies is a niche within a niche. As a broker, understanding the inherent risks of construction factoring can help you find the right factoring firm that will successfully fund your client. Understanding how each factoring company operates is also important to knowing whether or not your client will get funded.
Actually, you don’t have to live in the fantasy world of “Oz” to successfully navigate the unique risks found in a typical construction deal. When you peel back the curtain inside the “Emerald City Factoring Company,” you’ll find that there are no wizards or wizardry going on at all. But for this article, I’ll be your Emerald City Factoring Company Wizard. I’ll help you understand construction factoring giving you the confidence to walk the walk and get your construction client funded.
Construction Factoring 101: Preliminary Lien Notice & Mechanic’s Liens
A Preliminary Lien Notice is a formal document sent by the contractor, sub contractor, material supplier, equipment lessor – and factoring company in some cases– to the owner of the project. This “pre-lien” establishes the right to file a mechanic’s lien later on down the road. If the pre-lien is sent and the claimant’s bill is paid, the pre-lien has no further legal effect. However, if the bill is not paid then the claimant may now file a mechanic’s lien on the owner’s property. An active mechanic’s lien on a property ties that property up, leaving it in a position such that it cannot be sold or transferred to another party until the mechanic’s lien is released. Roughly 40 states in the US require a preliminary lien to be present before a mechanic’s lien can be enforced–check the laws in your state to see where you stand.
The Emerald City Factoring Company often requires its construction clients to provide evidence of a pre-lien being sent to everyone up the food chain, including the owners. In fact, Emerald City Factoring Company has been known to file a pre-lien of its own to further protect its position. True, Emerald City Factoring Company is not a contractor, supplier, or equipment lessor. But, because Emerald City Factoring Company has a blanket UCC1 on all assets of the client, the factor is indeed a supplier of material and equipment on the job. Even if the General Contractor argues a factoring company has no legal standing to file a pre-lien, the owner doesn’t care. The owner will simply tell the General Contractor to ensure all invoices are paid to all subcontractors so that the factoring company’s pre-lien won’t magically turn into a mechanic’s lien. Having the pre-lien in place allows the Emerald City Factoring Company to file a mechanic’s lien if payment is not made, which means the Wizards running the show can sleep well at night.
Construction Factoring 102: Payment & Performance Bonds
Performance bonds are used in the construction industry as a tool for the owner of the property being developed to guarantee that the value of the work will not be lost in the case of an unfortunate event (such as insolvency of the contractor.) A payment bond guarantees that the contractor will pay the labor and material costs they are obligated to. Shoddy work, sub-standard materials, and corner-cutting put Emerald City Factor’s factored invoices at risk, because if the owner throws your client off the job, the bonding company can step in and finish the job – and then back charges your factoring client. It’s unlikely that a bonding company will subordinate to the factoring company, and thus the factor’s lien on the receivables may be primed by the big bad bonding company.
So, how do you prevent the Wicked Witch of the West coming through to spoil the party, kick your contractor off the job, and call in the bonding company to clean up the mess? Unlike Dorothy, clicking your heels and repeating “there’s no place like home” won’t prevent the damage done by that under-performing contractor factoring client of yours.
Invite “Captain Obvious” to work for the Emerald City Factoring Company. He’s the guy that usually shows up after the disaster struck, and is rich with advice on what you should have done. These are usually “DUH” moments but, in retrospect, they were so obvious and simple that you may have over looked them. Here’s what Captain Obvious has taught us over the years:
- Have your contractor client share the bid file with you. Go over each scope with a fine tooth comb. Ask the contractor to tell you what % gross profit was built into each unique scope. Use common sense to work out where the estimate may be wildly optimistic. Is there enough gross profit in the estimate for them to have “oh crap” room? More importantly, is there enough room in the estimate to cover the costs of your factoring services?
- Ask about the job costing engine that the contractor is using. Are they plugging in the job budget before the job starts, and then recording costs against the original budget? Ask the contractor how long it takes for their AP accounting staff to enter job costs against each job. The costs need to get added to the job cost engine almost immediately after they are incurred.
- Ask to be shown a copy of a recent “over/under” billing report. This report will show whether or not the job is hemorrhaging cash as the job is happening. If the job is over-billed, the contractor is in a strong cash position on the job. If it’s under billed, it means the contractor has spent more on the job than they have yet to bill. Running jobs under billed for too long is probably what brought the contractor to you in the first place, so don’t be surprised to see this – just monitor it so that you know just how bad the situation might be.
- If your contractor’s eyes gloss over when you ask them about job budgets and job costing and over / under billing, then you might have a different sort of problem on your hand. Without these tools in place, the contractor will have a tough time knowing whether or not he’s profitable and whether or not he has the longevity to complete the job. Yes, even with factoring company in place, there’s no avoiding disaster when working with a contractor who doesn’t watch his budgets.
- Get a hard hat and a vest with fashionable fluorescent reflective tape. Travel to the job site at least once a week to make sure progress is being made and to be visible to your client. You’re in luck if you have a pick-up truck and even better if you have a pick-up truck with a diesel fuel tank in the bed. This way you can top off the heavy equipment on the job site so that they’re ready for a full day’s use tomorrow!
- While at the job site, cozy up to the project manager / superintendent that is in charge of your client’s performance. He’s usually the person who will approve or deny the progress billing requests. Be up-front with him and tell him that you’re the “money guy” behind your client. Ask the project manager regularly about progress on the project. Are there dicey issues that you can take up with your client to make the job run smoothly?
- Be the guy that a) brings the donuts and coffee into the planning meetings and b) has a cooler full of sodas and snacks for the laborers. Develop relationships with people on the job. Not only are you looking after your investment, but you’re sure to get “insider” information about the performance of your client. Another added benefit to being on the job site consistently? More clients. As you’re talking with the project manager, it’ll be no secret what you do. I can’t tell you how many clients Emerald City Factors has earned as a result of job-site schmoozing.
- Most of all, be useful on the job site, and then get out of there. Bring lunch to the trades people. Ask your questions. Get invoice approvals. Find out when the city / county inspector is coming to inspect your client’s work (and be there for those inspections!) Do no harm.
- Require that your contractor provide you with weekly job cost reports. Measure the actual job costs against the original job budgets. If you start to see a budget getting to the end of its life, investigate. Find out if there are change orders that you don’t know about. Maybe it’s just job cost entry errors (costs being tagged to the wrong element of the job). Don’t accept your client’s word for it when he tells you “I’m on time and under budget.” Expect that he’s not, and verify with proof in the job cost / budget reports.
Construction Factoring 103: Progress Billing & Retention
The c-c-c-cowardly Lion will tell you that the contractual ability to off-set the cost of defects or repairs against previously approved billings is what prevents him from getting into the construction factoring game. In other words, the Lion is afraid that even after the general contractor approves an invoice, somehow he or she can still legally refuse to pay any or all of the approved invoice. This is typically when retention comes into play. Retention is a process by which the general contractor will hold back usually 10% of a progress payment. This 10% is not paid to the contractor until the end of the job, when all the punch list items are completed, and when the owner is satisfied with the material and workmanship. Think of it as a “reserve” account of sorts.
Be sure you understand that a progress billing invoice may have retention – if so, don’t advance against the full value of the invoice. Gauge your advance based on the invoice amount AFTER retention is taken out. Don’t fund unless and until you get the general contractor to physically sign your approval letter. Put language on your approval letter that says something to the effect of: “Invoice approved without offsets or deductions” and then pray that you don’t ever have to defend that language – a costly adventure in the American Justice System!
Construction Factoring 104: Distance Makes the Heart Grow Fonder
Emerald City Factoring Company is located in the Heart of Oz. Let’s say that your construction client’s project is all the way over in Kansas, so there is no chance that you or your wizard staff can visit the job site to protect your investment and market to others on the site. In that case contract with a broker, or a construction manager, to visit the site on your behalf. Get some eyes and ears on the ground at the job site, and be sure to review the budgets and job cost reports on a regular basis. If you want to get really creative, partner up with a bookkeeper who is local to the construction client and job site. Ask that your construction client consider using a chosen bookkeeper who knows how to manage construction job costing and billing. You’ll be singing the praises of Glinda, the Good Bookkeeping Witch of the North before you can say “there’s no place like home, there’s no place like home, there’s no place like home.”
The c-c-c-cowardly Lion gets Courage
It’s always easier to get something done when you have a little bit of experience. Dorothy didn’t get home without taking a few calculated risks. Consider funding a small deal, perhaps a spot factor on a small project will give you some practice but won’t cause you to lose sleep. You can learn the lingo of the contractor (and flatter your client) by asking questions about the business. Or, consider working with non-competing factoring company who does construction and let them teach you the ropes.
Just watch, before long you’ll be chanting in your sleep: “There’s no factoring like construction factoring…”
Steve Ontiveros is the founder and president of The Factoring Place, Inc. a privately held full service factoring brokerage firm specializing in construction factoring deals (including progress billing.) He can be reached at firstname.lastname@example.org or 510.223.1285
I’ve worked in the alternative business lending industry for quite a while and I’ve noticed something off about many of the marketing campaigns. Some lenders have gotten so caught up in the funding that they’re losing sight of what it’s like to run a small business. Admit it, we’re all a little rusty even if we were once small business owners ourselves.
I started working as a deli clerk when I was 15 years old and continued to do it part time until my senior year of college when I began waiting tables at a restaurant instead. I could definitely tell you a few things about the daily grind and the epic drama that happens in the back of the house on a Friday night, but it’s been a while since I lived it.
But don’t you own a small business now? Yes, I do. I’ve been a part of two successful Merchant Cash Advance start-ups and I went off on my own full-time near the end of 2011. These days I have vendors, invoices, customers, contractors, accountants, and lawyers to deal with. I have monthly financials to reconcile, servers to monitor, and office rent to pay. But let’s be honest, my experience doesn’t really translate if I’m on the phone with a merchant that just had a waitress quit, a 12-top walk out on the bill, and an oven break, all while a health inspector is doing an unannounced review. Yeah, something about THAT is a little different than my day-to-day routine.
Sometimes we need to take a step back and stop trying to find the algorithm that best calculates FICO scores and monthly cash flow figures and start analyzing small businesses for what they really are. That led us to an interesting idea; Why not have actual merchants spell it out for us? What better way for us to connect with the retailers and service people of the U.S. than to have a two way dialogue right here on MPR?
Starting today, we’re announcing our experimental Small Business Corner, aka The Frontline. A small group of actual retail store owners or managers are going to contribute regularly with stories, tips, and advice about what it’s like for them. I think it will be insightful for us, as well as for the other small business owners that visit our site.
As the alternative business lending industry gets more saturated, shouting from the rooftops that you have “cash available with fast approvals!” isn’t a way to connect with the actual businesses that may benefit from a cash infusion. I’m guessing we’ll learn what does. These contributors are free to write what they want, so there’s no telling what’s in store. We hope you enjoy it.