Small Business Corner
The Importance Of A Profitable Business Model And Creative Financing For Your Broker Office
August 10, 2015
Continuing The Year Of The Broker Discussion, I wanted to touch on another aspect that isn’t discussed too often in our space (Independent Broker or Independent Agent space), and that’s the importance of creating a profitable business model and rounding up creative debt financing for our Office.
I believe it was the Roman Playwright, Plautus, that said, You must spend money to make money. This is certainly true for Independent Brokers and Agents, as we are entrepreneurs in every sense of the word, or if you operate a one man show like I do, then you would be more along the lines of a solopreneur which is new terminology floating around that refers to certain special entrepreneurs who run their business solo with full responsibility over the day-to-day operations.
However, despite the fact that one must spend money in order to make it, it begs the question as to why many new Brokers have very little networks, resources and other sources for financing?
Not only do they lack these resources, but many new Brokers also have not truly developed a scientific business model for their office based on: If I invest XYZ in data, marketing and all other aspects in association of producing 1 new closed deal, I would receive XYZ back into terms of the revenue off the initial closed deal as well as XYZ back in terms of recurring revenues on the renewals of said merchant.
Many new brokers lack both a scientific and profitable business model, along with efficient financing for said business model, which threatens their survival going forward.
Your Profitable Business Model
I argue with investors across the Investment Community all of the time in relation to which is better in terms of building the most Wealth, is it investing in Stocks or operating your own Profitable Business Model? I have always believed creating your own Profitable Business Model was the fastest way to Wealth due to the lack of control one has over the returns you can generate through the Stock Market. Commentators like James Altucher tend to agree with my mentality as he says: The best way to take advantage of a booming stock market is to invest in your own ideas. If you have an extra $50,000 don’t put it into stocks. Put it into yourself. You’ll make 10,000% on that instead of 5% per year.
I’ve always used a model of at least a 400% return within 24 months for operating my office because, not only did I have to cover business expenses and taxes, but I also had to cover my personal expenses, the funding of my emergency funds/savings, and the funding of my retirement accounts which includes SEP IRAs, Social Security, and Health Saving Accounts.
So for example, my model might have it to where if I invest $30,000 into my office, that should produce revenues of around $180,000 within 24 months, revenues include commissions from new deals, renewal deals, side processing residuals and other valued added products. This would leave a profit before taxes of $150,000 or a 500% return. Now the 500% range is just the benchmark used, in terms of actual returns, they have been at least double this amount due to my focus on maintaining clients for the long term as with recurring clients, there are no investment dollars spent on the acquisition of those additional revenues but they do continue to add to the overall “profitability” measurement of the original investment.
Utilizing this predictable model allows for the use of creative financing for leverage, cashflow management, along with the preservation of savings, and other investment portfolios. One of the tools I have been using for creative financing have been Credit Card No Interest Promotional Offers.
Using Credit Card Promotional Offers To Finance Your Office
I’m a Dave Ramsey fan like many Americans, but I’m totally against Mr. Ramsey’s consistent hammering of the use of “debt,” specifically the use of Credit Cards. Credit Cards are just like hand guns, if you put the gun in the hands of a solider, police officer, hunter, or a responsible home owner, then you protect human life, build nations and protect communities. If you put the gun in the hands of the common Chicago inner city street thug, then you get crime and homicide. If you put a Credit Card in the hands of a responsible person, the Credit Card is used to bring a variety of additional benefits to said user. But in the hands of an irresponsible person, the Credit Card just adds to their financial woes.
If you strive to keep your personal credit profile clean and with high efficiency, you should qualify for a number of Credit Cards that not just provide cashback rewards, but they provide short term financing in the form of 0% interest for 12 – 18 months, with a 1% – 3% upfront fee. This means you can receive an up to 18 month loan for only 1% – 3% in borrowing costs. These offers are not presented just when the card is opened, but they are generated usually on a monthly or quarterly basis.
So coming back to my business model, I might put that entire $30,000 on a credit card promo deal for 18 months with an upfront fee of 3%, which means the borrowing costs are $900. I would continue paying the minimum payment every month which is usually calculated as no more than 0.5% – 1% of the outstanding balance. I would invest the $30,000 into my business model and would have obtained the break-even return and profit measurement in a relatively short period of time (usually 3 – 5 months) and then be profitable on the investment. I would eventually end up paying off the outstanding balance on the Credit Card well before the promo period ends, which further increases my positive credit history allowing for larger credit limits to be requested.
Other Benefits Of Credit Cards Over Other Payment Options
Credit Cards also provide a host of other benefits including cashback rewards of anywhere from 1% – 45% depending on the reward category, these rewards and savings are not available through any other form of payment option. If you seek out cards with no monthly fees, setup fees or annual fees, you could run up balances, pay them off before the grace period ends, and obtain a stream of free income.
Credit Cards also include Chargeback Protection that can save you a significant amount of headaches down the line should you run into an unscrupulous vendor, or if you are the unfortunate victim of theft such as a robbery, identity theft, strong-arm theft, etc. For example:
- If someone steals your wallet and goes on a “card swiping spree”, once you report your Credit Card stolen then you aren’t responsible for any of those transactions. This isn’t as efficient if you carried a Debit Card, as the money would be gone from your Checking Account until the Bank recovers the funds in 30 – 90 days, which might cause you some cashflow issues. If you carried Cash, the money might never be recovered.
- If you ordered something from a vendor and didn’t receive it, you are protected with the use of Credit Cards. With a Debit Card or Check, it will again take 30 – 90 days for the dispute to complete with the Bank, however, throughout this period of time the money is still gone from your account until the dispute is over, which might cause some cashflow issues. If you used Cash for the order, the money might never be recovered in this case as even though you are likely to obtain a judgment by suing the vendor, the Courts do not assist you with collections.
To Wrap
In order to survive going forward as an Independent Broker or Agent, remember the importance of developing a profitable business model as well as having low cost sources of financing for said model. Credit Cards are one of the ways you can creatively finance your business model.
I’m on track to end the year with near or over $200,000 in total credit limit availability. This credit limit availability is spread out over a number of different accounts, but some of my favorite Credit Card Accounts include: The Double Cash Card ™ from CitiBank, The Discover IT Card ™ from Discover Bank, The BankAmericard Cash Rewards Card ™ from Bank of America, The Chase Freedom Card ™ from Chase Bank, The Upromise Mastercard ™ from Barclay’s Bank, The QuickSilver Rewards Card ™ from Capital One Bank, and The Blue Cash Everyday Card ™ from American Express.
How Will Obamacare Affect Small Businesses?
December 12, 2013It’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
Can An Increase In Cosmetic Surgery Open New Markets For You?
November 13, 2013
As reported by the American Society for Aesthetic Plastic Surgery, cosmetic surgical procedures have increased more than 3 percent in the past year, with approximately 1.7 million procedures performed in 2012*. This may not appear to be a drastic rise, but considering that in the past 16 years the number of cosmetic procedures for women has increased over 252 percent*, it is clear that this market is growing exponentially.
However, although more people might be opting for cosmetic procedures, it does not necessarily mean that more people have the funds readily available or are being approved for financing for such procedures. These can include anything from cosmetic surgery, Lasik eye surgery, cosmetic dentistry or even hair replacement.
When individuals do not have the money right away for these services, they typically can select the option of financing through their selected doctor’s office, if offered, or CareCredit, a credit card designed for patient health, beauty, and wellness needs. But if they are denied, where can they turn to next?
Healthcare industries now have the opportunity to offer an additional method of patient financing to guarantee patients have every possible option to obtain the funds they need for their desired service. External business financing institutions that provide healthcare and patient financing enable practitioners to ensure that no matter what, there is a way for a patient to obtain their desired procedures.
One of our close partners, a national Lasik surgery provider, has been able to expand their business by taking advantage of such financing services. As a national Lasik provider performing more than 950,000 procedures over the last 14 years, our client has been able to improve their CareCredit financing approval rates from an approximate 50 percent to almost 100 percent.
When denied CareCredit, the patient then has the option to get interest-free financing directly from any business financer. With a small deposit of varying percentages to the provider for the procedure, the doctor is removed as the middleman. This works as a non-recourse transaction, as the patient deals with the external financer directly for their monthly payments. These occur in small installments for the general option of 12 to 24 months, offering the patient flexibility without worry.
What opportunity does this present to ISOs? With the option of these new services, there is the potential for growth into an expanding and relatively untouched market. When offering this solution to doctors and medical providers as a method of subprime patient financing, the doctor can be assured of increased clientele and traffic growth for individuals who may have been previously denied by existing financing options. In addition, as many independent sales operatives currently work with credit card processors, this can only be seen as one more desirable service or market to explore.
* Reference source: http://www.surgery.org/media/news-releases/cosmetic-procedures-increase-in-2012
Merchant Cash Network Hosts MCA Info Session
April 20, 2013I recently had the opportunity to sit in on an informational session for small business owners hosted by New York City based ISO, Merchant Cash Network (MCN). On Wednesday April 10th, small businesses packed into a room at 1375 Broadway to learn about alternative financing with a focus on Merchant Cash Advance. MCN’s vast knowledge on the subject was obvious and I definitely believe these grass roots sessions are an excellent way to both educate the public and to bring businesses together to network. Great work guys!
Factoring Construction Deals: It’s not impossible
April 18, 2013
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 steve@thefactoringplace.com or 510.223.1285
