The Green Sheet Online Edition
June 27, 2016 • Issue 16:06:02
The alternative financing rebrand wrap up
In two prior Street SmartsSM articles, I delved into how merchant level salespeople (MLSs) can rebrand as alternative financing professionals. While, in general, this would include reselling a range of commercial lending products, my conversation focused solely on merchant cash advances (MCAs) and alternative business loans. That is because of the ease with which MLSs can cross over from leading with payment processing to leading in with MCAs and alternative business loans.
If you want to review the two prior articles, please refer to Street SmartsSM articles "The merchant cash advance" and "The alternative small business loan," published by The Green Sheet, April 25 and May 9, 2016, in issues 16:04:02 and 16:05:01, respectively.
In this article, I will discuss setting up your broker office to resell MCAs and alternative business loans.
Vet all potential partners
When you begin constructing your network of funders, vet all potential partners to make sure their standing in the marketplace is high, both in terms of platform efficiency and track record of ethical behavior. Look for all of the following when vetting potential funding partners:
- Has the business been in operation at least two years?
- Has it funded at least $10 million in volume?
- Is it licensed in any particular state?
- Is it registered with the Better Business Bureau?
- Does it have a professionally designed website that's been registered for at least two years?
- Does it operate from a business email address or from a Gmail or other generic email address?
- Does it have a physical location and a full staff of employees?
- How easy is it to reach someone in customer service?
- Is the business listed in basic online directories likely to cause it to come up in a Google search?
- Are any of the company's principals listed on Linked-In? If so, what is their background?
- Does the business have press or media releases pertaining to funding rounds it has received?
- Does it provide MCAs, alternative business loans or both?
- What are the company's underwriting criteria?
- Does it provide professionally laid out broker agreements?
- Are brokers paid renewals for the lifetime of the client's relationship?
Organize by paper grades
A paper grade represents the current risk profile of your merchant, which determines what his or her approval amount, risk based buy rates, and other conditions will be. In terms of this space, A Paper is considered to be the best in quality; F Paper is considered to be the worst.
The paper grade will be determined by the merchant's estimated FICO score and how many of the following profile weaknesses appear in the merchant's profile:
- Bad business credit profile
- Bank statements with NSFs/overdrafts
- Not so healthy bank balances
- Tax lien or judgment lien on a payment plan
- Dismissed or discharged bankruptcy filing
- Business landlord or mortgage missed payments that funding can resolve at closing
- Higher risk industry
Establish one to two funders for each paper grade, as some funders specialize or are better suited for only certain types of paper grades. Following are the typical parameters for the six paper grades:
- A Paper has at least a 650 FICO score and no profile weaknesses. These merchants will qualify for the best buy rates in the industry.
- B Paper has a 600 to 640 FICO score, with no more than two profile weaknesses.
- C Paper has a 540 to 580 FICO, with no more than two profile weaknesses.
- D Paper has a 500 to 530 FICO, with no more than three profile weaknesses.
- E Paper has a 475 to 490 FICO, with no more than three profile weaknesses.
- F Paper has a FICO score below 475, with more than three profile weaknesses
Beware of stacks
For the last few years, competition in this sphere has increased dramatically. Numerous new funders have entered the market and are doing second-, third- and higher-position stack deals. In this scenario, one company funds a merchant (first position), but another company comes in and does a second-position stack on top of that, and then another company does a third-position stack, etc. I've seen this go up to 11 stacks on a merchant's profile.
Merchants who stack on a second position automatically go down two paper grades from their original paper grade. Thus, if a B Paper merchant adds just one stack, his or her business goes straight down to a D.
If you don't want to go it alone, companies in the space, for example, Cardinal Equity LLC, www.cardeqgroup.com, can partner with you in a co-brokering structure. This enables you to focus on the sales process rather than having to devote time to managing funder networks. I recently reached out to Cardinal Equity's Director of Operations, Amanda Kingsley, for commentary in relation to our rebranding discussion.
"Cardinal Equity is an umbrella company with a main focus on building relationships and supporting a process for originating offices," Kingsley said. "We want to enhance the user experience when qualifying and applying, no matter how a business owner decides to apply. The unique service concept envisioned with collaborative innovation from direct partners, falls right in line with the financial technology marketplace."
Regarding how a company like Cardinal could assist MLSs who are rebranding to lead in with the merchant cash advance and alternative business loan products, Kingsley said, "We offer a trusting outlet for the working broker by offering service rather than selling. We enhance a broker's capability to reach new qualified outlets and convey information to clients that better characterizes what our industry offers. Our training for direct partners includes introductory basic training and in-depth pre-underwriting to different points of an application, to help indirect companies become more efficient and, in turn, create better experiences for their clients."
As you go forward in rebranding as an alternative financing specialist, you can stay connected and network with industry professionals through both deBanked and The Daily Funder.
- deBanked, www.debanked.com, is a dedicated online and print publication founded by MCA veteran Sean Murray (@financeguy74), that covers hard news and provides opinion commentary in relation to the alternative financing industry.
- The Daily Funder, www.dailyfunder.com, allows members to network and discuss topics with other players within the alternative financing space, in order to gain access to insider news, analysis, trends and current hot topics.
Should you decide to pursue this path, I wish you nothing but success in your quest to rebrand, rebuild and reignite your office as an alternative financing specialist.
John Tucker is Managing Member of 1st Capital Loans LLC, as well as an M.B.A. graduate and holder of three bachelor's degrees in accounting, business management and journalism. Tucker also has over nine years of professional experience in commercial finance and business development. You can contact him by email at email@example.com or by telephone at 586-480-2140.
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