Negative Experiences and Character
November 17, 2015The holiday season is here and I wanted to share an insightful story of a time where a horrible job position made me realize a lot about the basic standards of conducting business
My last call center position was at a huge customer service center for major retail online stores. This was my third holiday season and I took a position in the Escalations Department. I don’t know if I was just a sucker and couldn’t say no because I felt bad (no one else wanted it), or if I wanted to play the “You Ruined My Christmas” game with the others. The previous year, there was a tally on the white board in the back office where weekly contests were held to count how many times we were individually told that we ruined Christmas. Here’s why…
The warehouses served as central clearing houses for multiple retailers and stored all types of products. It wasn’t a surprise if someone ordered a baseball jersey and received a Dora the Explorer play set.
The best part was when you went to help the customer with reordering in time, the item was almost always back ordered or out of stock completely. That meant reordering wasn’t even possible. Sorry, you won’t be receiving your item for Christmas.
We knew that if it was out of stock with one company, it was out of stock for all of them. The customers would end up calling different branches of our call center expecting to reach each individual store’s customer service department. They didn’t understand that all the calls were routed to the same place, to us.
By the time the customer called all ten online customer services, they would call back and get Me; An escalation of the first company that messed up everything and I now took time away that couldn’t be replaced. Imagine eight hours of this. Anyways, we ruined a Christmas and there was nothing that we could do. We knew it wasn’t really our fault and that’s what helped us sleep at night.
Fast forward eight years later, I realize that even though my position sucked (lack of a better word), it was needed and how we handled the situations were actually really effective for the company brand. Here is why…
No matter the negative situation, the following verbal comments and impacts are the same when it comes to Customer Relations…
Blame:
- You
- The Company
- The Company’s Process
- The Company’s way of getting to that process
Impact:
- I should have just…
- I will never…
- I’m going to tell/share…
In retail, nothing can be undone immediately when the customer receives the wrong items. Issues are usually out of the hands of any representative if they followed the procedures given to them by the main source. There is something that could have been done in the process, like quality assurance or better shipment organization but you stick to what you can do and follow appeasement procedures. We do this just to “keep them” and not take the negative experience with them and pass it along. If we didn’t appease after negative situations, we would all base our theory on the saying, “it’s just one customer.” In turn, we would have millions of customers complaining and it would catch attention of prospective customers.
Sounds familiar? It sounds like us.
Negative experiences and providing resolutions reflects on the character of not only the company, but the process that everyone shares within an industry or how we represent a brand. We are all pointing fingers at each other for the negative impacts we endure. Defaults, backdooring, lies. Not only is this reflecting on each other functioning in this industry, but the merchant is getting the worst part of this. Individually we have our own standards and best practices on handling a negative situation, but how a negative situation starts and how we could avoid it, is the first step to change.
In our industry words and actions play hand-in-hand since we are technically online based. Your words are the characterization and the actions solidify the process and trust you are offering when the customer (merchant) comes to you for that product. When it comes to originators and those who are the representations of the direct funding companies you submit to (contracted to originate for), you must characterize yourself to reflect the product they offer by providing correct information and a streamlined process as any customer would expect from any person or company they decide to do business with.
Increasing Barrier to Entry (Self-Regulation)
November 15, 2015
Having been involved in our industry in some capacity since January 2007 (Merchant Services direct sales from 01/2007 – 04/2009 and alternative financing from 11/2009 – 09/2015), it has always been amazing to me to see just how low the barrier to entry is into our space, due mainly to companies relying heavily on the highly profitable Mom and Pop Network.
I have made reference before to The Mom and Pop Network that exists in our industry, which is just a group of random brokers who will resell for free (they cover their own expenses on all commission). A funder might have a Mom and Pop Network of 3,000 brokers that bring in on average of 10 applications a year (30,000 apps), with 35% getting approved (10,500) and 30% closing (3,150), with an average funding per client of $30,000. This is close to $95 million in annual funding volume that comes in very profitable and in a lot of ways, very “risk-free” in terms of new client acquisition ROI.
PROBLEMS WITH THE MOM AND POP NETWORK
Companies in our space relying heavily on The Mom and Pop Network, is why the barrier to entry is so low, as the major players want to continue benefiting from free marketing/advertising by recruiting hundreds to thousands of random, inexperienced, experienced, ethical, or unethical agents/brokers, who are willing to work for free (100% commission) and cover their own expenses, all for the rah-rah sales dream of striking it big.
The reality however, is that The Mom and Pop Network creates a number of problems for our industry which cause merchants to lose faith in all agent/brokers in the space, as well as causing somewhat decent funders, lenders and merchant processors to end up on RipoffReports and other negative review sites. These problems include but are not limited to:
- Merchants being the victim of rogue agents/brokers ripping them off, stealing from them, flat out lying to them, forging signatures, doing bait and switch pricing tactics, and other measures.
- Merchants being the victim to an inexperienced agent/broker providing the wrong information on pricing, terms, conditions, and other aspects which leave Merchants in a bad position long after the “close” of the sale.
- Merchants being the victim to the flat out unprofessionalism on behalf of these rogue and inexperienced agents/brokers.
THE MOM AND POP NETWORK IS THE LAZY WAY TO BUILD A SALES FORCE
The reality is that The Mom and Pop Network is a lazy way of making a profit in the professional Sales game. Instead of actually developing a quality in-house training program that creates a high quality professional Sales Team backed with knowledge, competency, market research, etc., most companies in our space would just rather hire a bunch of random people with a pulse, feed them the rah rah sales motivational dream speech, throw them against a wall and pick off what sticks.
The vast majority of the individual agents/brokers listed in the Mom and Pop Network do not make enough money directly from the activity to make a living, but as a collective whole, the company gains new clients in one of the most profitable and risk-free manners possible.
But in return for that profitable and risk-free procedure, a ton of damage is done to the industry that’s irreplaceable, continuing the threat of government regulation coming in and totally changing the way we all do business for the worse.
RECOMMENDATIONS TO CLEAN UP THE MOM AND POP NETWORK (SELF-REGULATION)
Funders, lenders and merchant processors surely won’t take my advice to end The Mom and Pop Network tomorrow, because it’s simply too profitable, so instead how about we take the following steps to create a more quality Mom and Pop Network?
To clean this up, every funder, lender and merchant processor should require extensive personal and professional background checks on every agent, broker and reseller that they bring on board externally, just as they would do internally with direct employees they would hire on W-2. Just because someone is a 1099 independent contractor, does not mean you might not still be named to a major lawsuit, held liable, etc., for their rogue and inexperienced actions to Merchants in the marketplace.
For Personal Background Checks:
- Pull their credit: If their credit is bad and they can’t provide some type of reasonable explanation, I wouldn’t approve them to begin reselling your services. Think about it, we are in the financial services industry where the rep is going out to “consult” a merchant on a financial manner, when they can’t even do something as simple as pay minimum payments on a credit card every month? Or pay their taxes on time to avoid getting tax liens? Either they are horrible at managing their finances or they just have bad character, neither of which we want to bring into our industry.
- Look for any previous criminal record history: If you have a felony for any reason, you shouldn’t be allowed to come in and resell services to merchants that give you access to SSNs, DOBs, home addresses, bank accounts, tax returns, financial statements, etc. This should be common sense.
- Look for any previous excessive civil record history: Are they getting sued a lot and if so, what is it for? If it’s something that points to bad judgment or bad character, don’t allow them to resell your services.
For Professional Background Checks:
- Look for any previous sales experience: Our industry is very competitive, so why on Earth would a person without any prior professional sales experience want to run in here and start selling for free (on all commission)? At the very least, look for previous sales experience of at least two years with verified references from the prior employer in terms of performance.
- Look for any type of higher education: I would limit all new entrants only to those who have “some college”. It might just be an associate’s degree or they might have only completed one year of college, but they should have “some college”. College in and of itself might not directly influence a lot of the performance in terms of what makes a good sales professional, but usually a good professional in general in today’s day and age, will have some level of college completed.
- Look for a business plan: Simply, what is their plan of action to come in and begin turning profit in our highly competitive space? Do they have the proper accounting, legal, market research, business planning, strategic planning, marketing mediums, etc. in place? If they don’t, then why are they here?
SELF-REGULATION IS THE ANSWER
The barrier to entry into our space will be increased when companies using The Mom and Pop Network model (funders, lenders and merchant processors) start conducting more thorough personal and professional background checks on their recruit prospects.
They need to limit their recruiting efforts to individuals who “appear” to be competent, professional, and serious about our industry, rather than just to anybody with a pulse and a heartbeat, without taking into regard their previous criminal history, bad credit, bad character, lack of sales experience and lack of any type of business plan to gain market share.
Grenville Kleiser (personal development author) said, “by constant self-discipline and self-control, you can develop greatness of character.” If we want to eliminate the bad character that’s running rampant in our space, then we are going to have to develop our own forms of “self” control (self-regulation) to produce a better industry, one that’s instead running rampant with great character.
Mr. Funder: Help ME, Help YOU (Rants On Funders and Lenders)
November 13, 2015
As we continue the Year of The Broker, I thought that it was time for a part two to my original rant article that blew off some steam on one of the most crucial elements in our industry, the merchants themselves. For this round, how about we take a look at another crucial element to our industry, the ones who create the platforms, raise the equity capital, create the products, fund the deals and pay the commissions. Of course, I’m talking about the Funders and Lenders.
Help ME, Help YOU
Mr. Funder, please Help ME, Help YOU. We all know the situation of why I, as an independent broker, are working with you and it’s because I’m a part of your Mom and Pop Network. The Mom and Pop Network is just a group of random brokers who will resell for free (we cover our own expenses), so your goal is to recruit hundreds to thousands of us to collectively produce tens of millions in annual funding volume for your organization.
But some of the things that you do Mr. Funder make it difficult for me to help YOU build your Mom and Pop Network, which in terms helps ME build my portfolio and commission stream. So allow me to list out some pet peeves that hopefully you, going forward, can fix.
#1.) New Deal Requirements To Keep Renewal Portfolio
Mr. Funder, you received free marketing and acquired new clients on behalf of my efforts in marketing, selling and closing. You had no cost associated with the acquisition of said client other than the percentage points paid to me in commission, but that was only after the fact that I bought you a quality client (that didn’t default within 30-45 days), there was no risk assumed by you in spending money on marketing with a chance of not recouping profit.
So why in the hell do you put provisions in place to try and cut me OFF from said renewal portfolio? Do you realize that my entire business plan is based on building up a renewal portfolio and “sitting back”? That’s why I’m in Merchant Services related sales, it’s all about the Renewal Portfolio. Mr. Funder, please remove your insane new deal requirements and stop trying to push good brokers out of their Renewal Portfolio.
#2.) Having An Incompetent Process
From the customer service and billing support “little girls” who are flat out rude, to the payment collections team who messes up fixed payment withdrawals, to the underwriters who throw out inaccurate approval numbers, to having an underwriting process that takes 48-72 hours for you to update me on a file, to the excessively long closing process that drags on and on into 10 business days (two weeks) which is way more than the promoted “3 day” closing period, Mr. Funder, can you please take a little more time to fix your process?
#3.) Allowing My Merchants To Stack
So you make sure provisions are in place that I, the Broker, do not stack the merchant and you make this clear in the Broker Agreement that I would be “cut off” from renewals if such action occurs.
But yet, in your Funding Agreement for the Merchant, you have absolutely NO provision, sanction, penalty, or anything in place to punish the Merchant for going out and stacking other than the fact that he might not be approved with you for a renewal (like the Merchant would care, after all, 10 companies are calling him a day offering him money).
This means that the Broker up the street can stack my Merchant with a 2nd position, you will decline them during renewal as a result of such stack, and the other Broker will offer another approval to then 100% steal the client over to their organization going forward. You Mr. Funder get paid off, the merchant gets more money, the other Broker gains a new client……the only one that gets screwed in this situation is ME!
Mr. Funder, please add an Amendment to your Funding Agreements for Merchants that will put fines in place if they stack, similar to how Merchant Processors put ETFs in place to stop merchants from switching their merchant accounts every month to save “$10”. This will STOP the stacking craze when a merchant realizes they will have to pay $7,000 per STACK.
#4.) Still Filing UCCs On Good Accounts
So Mr. Funder, it’s common knowledge that the mass new entrants of brokers into the industry are all pounding away on UCC records, causing said merchants to receive 15 – 20 calls a week for “funding”. So knowing this Mr. Funder, why in the hell do you keep filing UCCs on good accounts?
If an account goes bad, you already have paperwork signed with said Merchant stating that a UCC “will be or could be” filed, can’t you just come back and file the UCCs only on the accounts that went to collections? Why file them on the good paying accounts so the Merchant is harassed all week long?
#5.) Over 30 Day Commission Clawbacks
No more than a 30 day clawback period should be in place. Once we start getting into 45, 60 and 90 day clawback periods, this means that you are inefficiently underwriting the merchant.
#6.) Excessive Stacking and Back-Dooring
Let’s start with back-dooring, once again, you receive free marketing from me and I’m only paid when I bring you a quality deal that funds. So why in the hell are you trying to steal my deals? Aren’t you already getting a good “deal” from me with all of the free marketing I’m doing for you? Mr. Funder, can you please stop back-dooring files?
In relation to Stacking, there’s absolutely no justification you can make for a 3rd, 4th, 5th, and 6th position stack. You can make a case for a 2nd position, even though it might still technically violate the 1st position lender’s Agreement, a 2nd position could work on a case-by-case basis.
There’s absolutely no justification for a 3rd plus position, all you are doing is taking way too much of the merchant’s monthly gross to where he might end up paying 40% (or more) of his monthly gross to Cash Advance companies. This makes absolutely no sense Mr. Funder, so can you please STOP doing this?
Final Word
Mr. Funder, please Help ME, Help YOU. My position as an independent broker in a highly competitive industry is hard enough. I have to cover my own insurance costs and I’m alone in this world in terms of developing my own profitable business plan to not just eat, but cover my other living expenses, pay for taxes (on time) and fund retirement.
Please stop making it harder for independent brokers with the above inefficiencies, keep your process as efficient as possible so that it can increase the probability of more of your independent brokers having career sustainability.
Industry Message Boards Crack Down on Anonymous Deal Grabbers
November 11, 2015
Industry message boards, including deBanked’s, have begun taking a stronger stance against anonymity to facilitate transparency and protect users. While anyone can still register with their personal addresses, a corporate email address must be provided in the course of soliciting business. Industry participants have reached a general consensus that soliciting deals while hiding behind a free email address raises a red flag.
With hundreds of legitimate vendors to choose from, there should be little need to transact with users that lack basic things such as a company name, office address and phone number.
“I’m bombarded with probably 10 emails every day of the week from a supposedly new lender that wants my business, and they’re really just a broker shop like we are,” said Cheryl Tibbs, in the September/October issue of deBanked Magazine. She warned that fake funders can steal deals and pocket the entire commission. They solicit deals in online forums, by email message or over the phone, and then they offer the deals to companies that really do function as direct funders, she said.
While no online forum was specified in the story, at least two forums have responded by cracking down on anonymity by suspending or banning violators.
The age of the gmail funder is coming to a close. Don’t buy leads from HotLeads4u69@hotmail.com and definitely don’t syndicate with a company that has no known address.
The Telephone Is The Broker’s Best Friend
November 9, 2015
As we enter the second week of November 2015, we are indeed continuing the Year of The Broker, which I believe will not end on Thursday, December 31st at 11:59 p.m., but instead will continue into the year of 2016. As a result, I plan on remaining right here with deBanked to continue the Year of The Broker discussion throughout the entire year of 2016. The mass entrants of new brokers into our space will surely not slow down any time soon, even though only a small percentage of new brokers will actually have some sort of career longevity. For these mass new entrants, they will surely have available a number of different Marketing mediums, but only one (in my opinion) might serve to be the most efficient considering time, costs, access and productivity.
#1.) Indirect Marketing Mediums
– Strategic Partnerships: Will be difficult to establish for new entrants due to established players already having agreements and integrations in place with a lot of the main players. Strategic Partnerships include organizations such as Banks, Credit Unions, Associations, Merchant Processors, etc.
– Mom and Pop Network: Will be difficult to establish for new entrants as there’s only so many sub-agents that could exist at any given time, and they usually (by this point) have already built up close relationships with their Funder Networks and larger Brokerage Houses.
– Indirect Ads and SEO: Will be difficult to establish for new entrants due to the high marketing costs and lower percentage of quality leads that are generated. The fact is that this medium attracts a ton of companies that won’t even qualify for our product, such as a lot of start-ups. Plus established players have pretty much already sealed quality positions and placements with high marketing budgets.
#2.) Direct
– The Mail: Won’t work for most new entrants due to the high cost of postage and packaging. In combination with the low response and conversion rates, for many this medium might not be profitable.
– Email: Only works after speaking with a client and serves as a good form of follow-up, but not good for initial contact as the emails will usually be filtered off as “spam” and one should be very mindful of national and state spam laws in relation to using this medium.
– Fax: Only works after speaking with a client and serves as a good form of follow-up, but not good for initial contact because the medium for initial contact is illegal.
– In-Person: Works decent, however with high gas costs, traffic jams, and other inefficiencies, this should not be used for initial contact, but can be used in conjunction with the Telephone.
……And speaking of the Telephone…….
The Telephone is going to be the most efficient medium used by new entrants and smaller broker shops today due to the following:
- Ease of Access: All one needs is a web based Predictive Dialer from the likes of a CallFire, YTel or Five9.
- Cost and Structure Efficiency: You can pay by the hour usage or pay a flat monthly fee for an unlimited monthly call volume. By the dialer being web-based, there are no IT specifications that you have to control on a daily basis.
- It’s Still Legal For B2B: It’s illegal for B2C in terms of the initial contact, but as of right now, it’s still legal for initial contact on the B2B side.
- Mass Productivity: It’s a great medium where one can work a 10 hour day from 9:00 a.m. to 7:00 p.m. EST, covering the East, Central, Mountain and West coast time zones. Over the course of these 10 hours, one can complete about 40 – 80 meetings with decision makers, as well as leave about 200 – 250 messages for said decision makers with employees or via voicemail.
Telephone Conversion Analytics
Over my time of directly selling both the merchant cash advance and alternative business loan products, I’ve found the following conversion analytics to be in place for new deals, and the following can assist you with your ROI planning:
- For every 15 decision makers that you speak to on a cold call, you should get 1 interested lead, or let’s say a conversion of 6.7% to leads. For a clear definition of a lead, refer to a prior deBanked article of mine here. Calling SIC generic listings can be considered a “cold call”.
- For every 15 decision makers that you speak to on a warm call, you should get 5 interested leads, or let’s say a conversion of 33% to leads. Calling UCCs can be considered a “warm call”.
- For every 15 leads, you should get 3 completed application packages, or let’s say a conversion of 20%. A complete package includes the application and 3 – 6 months of bank statements.
- With an efficiently constructed Funder Network based on Paper Grades of 1-2 Funders for A+, A, B/C, and C/D, you should be getting approved files of about 40%, with a closing ratio of 30%.
Final Word
What will happen if B2B Telemarketing becomes illegal for initial contact just as B2C Telemarketing currently is? Would that likely be the final death blow to new brokers and smaller broker shops in terms of their ability to market efficiently and profitably?
I’m not sure, but as of right now, it’s the most efficient form of Marketing medium for new broker entrants and small broker offices. If it were to ever be taken away (become illegal), I think it might be much harder (if not impossible) for smaller broker shops to survive.
Brokers: It’s Okay To Be A Piker
November 5, 2015The Financial Services Industry is famous for coming up with different connotations that are outside of the comprehension level of the general public. Such connotation listings include terms such as: Derivatives, EPS, Diluted EPS, SPO, EBITA, Par Value, among others.
But there’s one word that I wanted to discuss in particular that comes off as a form of “slang” within the Industry, and that’s the word Piker. To be called a piker by someone in our industry, is to be called a person that thinks small, reaches for small goals and doesn’t dream big.
MASS NEW BROKER ENTRANTS HAVE BIG DREAMS
The Merchant Cash Advance Industry is in a major bubble right now, with a large quantity of new broker entrants into the market all with big dreams inspired by the myriad of industry recruiting ads, highlighting that with little-to-no experience, you can jump in and make $20k a month. The “rah rah” sales motivational speeches soon follow with examples on how one guy is making $25k per month, how another guy just sold his MCA firm and cashed out for $5 million, how another guy made $1 million last year alone, and how YOU can do all of this too if you just come on in and start dialing!
So the big dreamers begin to dream……
- “This year I’m what Dave Ramsey calls a Whopper Flopper. I hate working in this crappy Burger King drive-thru, it’s time to start making my dreams come true.”
- “Next year, I will be making $20,000 a month and driving around in a Mercedes-Benz S-Class.”
The guy joins the new rolls of rookie/new broker entrants on web based predictive dialers calling merchants about a “UCC” they filed 3- 12 months ago. He will start out with about 150 merchants to call on Monday about this UCC filing, and by the time he calls those merchants on Monday, they would have already been called by 15 – 30 other companies over the previous two weeks alone.
In other words, they will all slam the telephone down in his face after he literally mentions the fact that he’s calling from any “capital or funding” company, without him even being able to get a word in.
DREAM KILLED (REALITY SETS IN)
The reality is that success in our industry is mainly due to leveraged resources, rather than actual superior “selling” capabilities. What happens is that 20% of the brokers in the market remain profitable and sustain a good career/operations going forward, where as 80% of brokers don’t last more than 3 – 6 months, mainly because the 20% has access to resources that the other 80% don’t have access to, that provides them a significant market competitive advantage. These resources include:
- Having Strategic Partnerships with Banks, Credit Unions, Processors and Other Associations
- Having Access To Financing (Debt and Equity) Allowing For A Much Higher Marketing Budget
- Having Access To Better Base Pricing
- Having Access To Better Quality Data
- Having Access To Better SEO Positioning
- Having Access To Better Marketing Channels
Mr. New Broker, you were hired to be a part of what I call The Mom and Pop Network, which is just a group of random brokers who will resell for free (you pay for all of your expenses). So they might maintain a Mom and Pop Network of 2,000 brokers that bring in on average of 10 applications a year (20,000 apps) with 35% getting approved (7,000) and 30% closing (2,100) with an average funding per client of $30,000. This is $63 million in annual funding volume for the firm from this source alone.
A DIFFERENT APPROACH: THE PIKER APPROACH
So Mr. New Broker, how about instead of following the “rah rah” sales crowd, how about you join me over here on the Piker side and we set some goals on being solidly in the middle class instead?
- Going based on individual income, you are considered middle class in the US for the most part if from staying in an low/average cost of living area, you make over $40k a year (lower middle class), $50k – $60k a year (the middle of the middle class) or $70k – $85k (higher middle class).
- $50k – $60k a year in a low cost of living area will still allow you to live in a great quality Suburb, if you strategically manage your expenses with efficient budgeting and tax reduction strategies.
- You also want to be putting away let’s say $7,500 a year into your retirement/investment accounts. If you do this for 40 years from 25 – 65, with just a conservative 5% per year return, you will have over $1 million at age 65. At 65 you could put that $1 million principal into a long term CD paying let’s say 3% per year, opt to receive the interest every month, and get $30,000 a year. Then when you add in your Social Security payments of let’s say $20,000 a year, this now gives you $50,000 a year in spending power without even touching the $1 million principal.
IMPLEMENTING THE PIKER APPROACH
The first thing you want to do is make sure you stay in a low cost of living area, so if you are in a high cost of living area like NYC or LA, I would move immediately. Secondly, you would setup your virtual office (in the cloud) to include your telephone line, fax line, website, etc. Thirdly, you want to focus on doing market research on various market niche challenges where you can come in and creatively solve outstanding problems, for example, you might do some of the following:
- Find new solutions for niche industries that don’t qualify for most MCAs, but would like an MCA.
- Find new solutions for start-up companies seeking working capital.
- Analyze big data sources to find merchants in particular situations that you could address.
Map out a complete strategic business plan with sales forecast estimates, ROI estimates, and partner with companies that have the infrastructure to help deliver the solutions you laid out. Keep your credit clean and use No Interest Credit Card Promo Deals to creatively finance your marketing efforts.
FINAL WORD – AM I DREAMING TOO SMALL?
Am I dreaming too small? Shouldn’t I be up all night focused on how to be the next CAN Capital?
My issue with the “rah rah” sales speech is that they preach from the TOP of the ladder in terms of the extravagant income estimates ( $250k – $1 million per year), without providing any information to New Brokers on actual strategies, competencies, networks, and resources needed to ACTUALLY amass such levels of annual income. It doesn’t make any sense.
So my advice for all New Brokers is to be a PIKER, which is to establish yourself solidly in the middle class first, then once that’s done, you can look at ways to expand on your competencies, resources and networks to grow into the six figure income range.
The Quiet Innovator: Meet Dean Landis
November 1, 2015
Have you ever wondered who helped evolve our industry from the boutique “credit card factoring” of yesteryear, to today’s multi-billion dollar Alternative Lending industry? Credit Cash LLC may not be the best known MCA company out there. However, over its ten-year history, its innovations have become industry mainstays. Founded by, Dean Landis, an established asset based lender in 2005, Credit Cash has always focused on larger deals to better credits; but is also largely responsible for many of the important changes that have improved our industry over the years.
Its first, and only slogan, “Our rates are so low, they’re actually loans,” was telling from the start. Well before On Deck and others made loans an alternative to advances, Credit Cash had determined that to attract larger and better credits, rates had to be far lower. With lower rates, a loan structure was more practical in lieu of the then existing true sale structure (innovation #1).
When Dean, Credit Cash’s founder, came up with his concept, he posed it to some of the existing industry leaders. While all were supportive, none thought that the product worked well with the low rates Landis was proposing. Back then, with underwriting a bit more primitive, default rates were typically higher than they are today. A competitor urged Credit Cash to license its underwriting and split funding operation.
What the others didn’t appreciate is that Credit Cash was going to use its decades of asset based lending experience to create a whole new method for providing working capital to SMEs. Dean represents the third generation of his family to own and manage a specialty finance company. His asset based lending firm, Entrepreneur Growth Capital, is one of the best known and highly regarded national commercial finance companies serving small and lower middle market borrowers. First, these would not be purchases of future revenue or credit card receipts. Landis didn’t believe that was actually a tangible object that could be bought and sold. Thus, he chose the loan structure and with it, fixed daily payments (innovation #2).
Next, while most of the MCAs at the time were solely using split funding, Credit Cash required the setup of a lockbox (innovation #3). This allowed each client to keep its on processor (innovation #4), but also gave Credit Cash more control over cash flow as all credit card receipts went through the lockbox, not just a percentage.
At this time in the industry’s evolution, all advances were based on credit card revenue, so clients were typically in food service, hospitality or retail. Early on, Credit Cash got a request from a Burger King franchisee. It was a good prospect, but there wasn’t enough credit card revenue to meet the fixed daily payments. That is when the idea of using an ACH to debit clients’ banks accounts was born (innovation #5). From there, it wasn’t long until both Credit Cash and others realized that this type of lending deserved a far larger audience than the existing marketplace. In fact, whereas restaurants used to be over 50% of Credit Cash’s business, it is now less than 25%.
One other change was in how Credit Cash treated renewals. At the time, clients were required to essentially buy back their existing advances in order to get more funding, thus increasing their costs. Credit Cash not only avoided this practice, but began offering early termination discounts (innovation #6).
Landis claims he is as surprised as anyone at the industry’s growth. While entering its 11th year, Credit Cash has intentionally not grown nearly as much as the other industry veterans. Credit Cash has always been a quality over quantity shop. In fact, they still do all of their underwriting by hand. As their average loan is over $500,000, Landis is hesitant to rely on computers and algorithms. Dean is interested in continuing to build a strong portfolio of borrowers who require additional capital with a creative approach. “Our borrowers appreciate that we are able to think outside of the box and take a hands on approach to underwriting and servicing their loans.”
As for growth, Landis jokingly admits that Credit Cash is often ISOs’ last choice. “Because our rates are so low, so is our commission structure. An ISO may make more money by funding a prospect elsewhere. Although because of the Credit Cash’s ability to fund much larger loans, it is not unheard of for an ISO to earn $100,000 or more from a closed, single transaction.” However, with larger loans, come stronger credits and more savvy borrowers. Landis continues to smile when stating that “a typical Credit Cash borrower would rarely take an MCA at the market rates.” However, ISOs continue to send Credit Cash deals as a funded deal, is better than no deal at all.
Blurring Small Business: A Troubling Narrative is Gaining Steam
October 30, 2015Almost 18 months ago at LendIt’s 2014 conference, Brendan Carroll, a partner and co-founder of Victory Park Capital said that in regards to business lending, “the government doesn’t have the same scrutiny on this sector as it does in the consumer space.”
This double standard is the crux of American capitalism. In business you can win or lose, be smart or foolish, risk it all or play it safe. Government regulations don’t let the average consumer be subjected to the same stakes. They are viewed to be at a natural disadvantage against businesses and thus there are laws to protect them, and perhaps rightly so.
Since entrepreneurship is a choice, businesses and the people that own businesses are held to a higher standard of acceptable risk taking. In the free market, the pursuit of profit holds the system together.
This economic worldview is part of the reason why entrepreneurial TV shows such as Shark Tank are so popular. In the Tank, contestants can just as easily walk away with a terrible deal as they can a good one. And when bad deals get made, and they do, I’ve yet to see regulators descend on the set to fine or arrest Daymond John, Kevin O’Leary, or Barbara Corcoran.
But Shark Tank features entrepreneurs on a remote stage detached from their daily environment, giving it the look and feel of a game show. If you want to see cold hard dealmaking with mom-and-pop shops on an up close and personal level, just watch CNBC’s The Profit. On the show, small business expert Marcus Lemonis does not sugarcoat what he is. “I’m not a bank. I’m not a consultant. And I’m not the fairy godmother,” he bluntly told one small business owner. It doesn’t matter if it’s a family owned store or a full fledged corporation, Lemonis is looking to make a deal and make some money. When it comes to business, he is well… all business.
Just as the CFPB hasn’t shut down Shark Tank, (which one has to wonder if they’ll be subject to Reg B of Dodd Frank’s Section 1071) none of Lemonis’ deals have been scrutinized by a Federal Reserve study, nor has the Treasury Department issued an RFI to better understand why entrepreneurs go on the show in the first place.
It’s no wonder then at LendIt 2014, Carroll also said that there wasn’t the same sort of moral hurdle when it came to institutional capital investing in business lenders as opposed to consumer lenders.
Moral was a telling word choice because the morality of certain commercial transactions have recently come under fire by groups claiming to represent small businesses. The premise of their argument is that commercial entities are no more sophisticated than consumers, that a corporation and the average joe are equal in their ability to take risks and make decisions for themselves.
Their evidence is that sometimes in business-to-business transactions, particularly in lending, one side accepts terms that would be considered far outside the norm for consumers, terms that violate a moral threshold. One has to wonder where a loan with an infinity percent interest rate ranks on this morality scale, a deal that’s actually been made and accepted several times on a TV show. Referred to as a “Kevin deal” since they are Kevin O’Leary’s favorite, the borrower is obligated to pay a perpetual royalty on top of repaying the loan itself. In simple terms, it’s a loan that can never be paid off.
In the case of Wicked Good Cupcakes, a business that appeared on Shark Tank in 2012, a mother-daughter team struck a deal that would cost them 45 cents per cupcake in perpetuity to Kevin O’Leary. Many fans criticized them for it and yet the two have said that they have no regrets.
The fact that Wicked Good Cupcakes decided what made sense for them and was happy about it, damages the storyline that businesses need to be saved from their own decisions. But there’s another problem, government entities themselves may be inadvertently effectuating this false narrative by inferring incorrect conclusions from their own research.
Nowhere is this more evident than in a report recently published by the Federal Reserve Bank of Cleveland that analyzed small businesses and their understanding of “alternative lending.” The report shared the results of two focus groups that had been shown terms for three hypothetical products that supposedly represented actual products in the real world.
Unsurprisingly, the report concedes “when comparing the products, participants initially reported the three were easy to compare and that they had all the information to make a borrowing decision.” But the researchers pressed on until they got an answer that fit their expectations, that small businesses are confused when it comes to money and finance.
In a hypothetical scenario where a commercial entity sold $52,000 of future receivables for $40,000 today, it stated that the “lender” would withhold 10% of each debit/credit card transaction until satisfied. Participants were then asked to guess the interest rate on this loan if they paid it back in one year. That caused a lot of folks to scratch their heads and that’s because it was a trick question.
The question itself introduced conflicting facts and lacked crucial variables to make an intelligent guess. Nevermind that respondents prior to that question said that there was “nothing confusing” about the products presented as is. The original feedback should’ve been enough. Below are some of the responses offered before they were deliberately tricked.
- “Nothing Confusing.”
- “No, it’s pretty straight-forward.”
- “I can’t think of anything more I would need to see, really.”
- “This is enough info for me to make a decision.”
The researchers concluded however that the answers to their trick question suggested there were “significant gaps in their understanding of the repayment repercussions of some online credit products and the true costs of borrowing.”
And while it might be true that they semi-admit to what they did when they wrote, “using only this information, calculating a true effective interest rate would not have been possible without making some assumptions,” the headline that spread thereafter was that small business owners are confused by alternative lenders.
But even if that was the case, at what point does confusion become unfair in a purely commercial transaction? And what would be an appropriate remedy?
We’ve been down this road before where federal regulators have set mandatory disclosures in order to bring transparency to a lending environment believed to be obscure. And just recently on September 17th, 2015, the House Committee on Small Business Subcommittee on Economic Growth, Tax and Capital Access pressed community bankers on the impact of such measures dictated by Dodd-Frank.
Congressman Trent Kelly asked if all the added new pages to loan agreements make it easier for their borrowers to understand. “Do they understand what they’re signing?” he asked.
B. Doyle Mitchell Jr., the CEO of Industrial Bank that was speaking on behalf of the Independent Community Bankers of America responded that they do not. “It is not any more clear,” he answered. “In fact it is even more cumbersome for them now.”
If anything, the Federal Reserve study offered compelling evidence that small businesses are happy with the way alternative lenders are currently disclosing their terms. It is only when government researchers tricked them that they became confused. That should say it all.
One consequence of entrepreneurship is that businesses are not created equal in their ability to assess financial transactions and no amount of disclosures or intervention can save them. There must be losers in order for there to be winners.
Case in point, there are lenders out there doing deals so lopsided that they actually turn to each other and say, “I can’t believe she took that.” Such is the case of RuffleButts, a children’s fashion line that appeared on Shark Tank in 2013.
“When they wake up, they’ll realize they messed up,” said Mark Cuban in reference to the deal Lori Greiner proposed and closed. An article on BusinessInsider.com covered the episode and unabashedly concluded, “Shark Tank isn’t a charity. The investors are putting in their own money, so they have every incentive to push to get the best deal possible for themselves.”
Shark Tank has risen in popularity because it is a reflection of a culture that believes dealmaking, both good and bad, is inherent to the endeavor of entrepreneurship. When a bad deal is made, regulators don’t come on the show to urge a do-over.
But what’s dealmaking got to do with the local pizza joint seeking $20,000 that doesn’t have the time to mess around on TV shows? Unlike lenders who refer to their transactions as loans or units, merchant cash advance companies and the agents who negotiate the transactions appropriately refer to their agreements as deals. How else would one label an agreement in which a commercial entity sells future receivables for a mutually agreed upon price?
And if the Federal Reserve study indicated anything, it’s that business owners feel there’s nothing confusing about these deals.
So it would seem that everything as Americans know it, watch it and understand it, is business as usual.
Even Brendan Ross, the president of Direct Lending Investments, was quoted by the BanklessTimes as saying, “I want to emphasize there’s absolutely nothing novel about lending money to businesses. This isn’t some phenomenon we are rediscovering. There isn’t going to be increased regulation because this isn’t new.”
Perhaps the only thing that could be considered new is that loan sizes have gotten smaller and the types of products small businesses can access has diversified. Along the way, some of these new startups have decided to offer products in line with a self-professed moral code, which is to deliberately lend money at a loss and lash out at lenders who seek profit.
There’s a term for lending startups that don’t make money. They’re called “failed startups.” By casting small businesses as being no different from unsophisticated consumers, it’s quite possible that shows like Shark Tank and The Profit would become illegal in the process. Disclosures meant to help make things more transparent could actually make things less clear and more cumbersome, just as they have in the past.
I don’t think anybody is in favor of small business failure or an environment where confusion prevails, including the guys making infinity percent interest loans like Kevin O’Leary. But if the goal is to increase transparency, it should be in a way that businesses on both sides are content with.
The Federal Reserve study showed the system is working well as is and that prescribing mandatory changes to fit some universal standard would only serve to usher in an era of confusion that everyone is trying to avoid. Lenders can always do better to serve their clients, but the free market must prevail. As Mitchell, Industrial Bank’s CEO said when he testified in front of the Small Business Committee, “the problem with Dodd-Frank is you cannot outlaw and you cannot regulate a corporation’s motivation to drive profit at all costs so while it has a lot of great intentions in over a thousand pages, it has not helped us serve our customers any better.”
