Commission Checks are for Suckers
Most sales organizations who enter the merchant cash advance business see a market, demand, and suppliers. Their calculus is simple; dive in and connect the dots to draw commissions from deals funded. Makes total sense right? On the surface, it may. However, as the industry continues to change, changes in approaches and strategy need to become perfunctory to continuing to thrive in the merchant cash advance business.
Brokers and independent sales partners have been a tremendous asset to merchant cash advance providers. To really understand the value that funders derive from brokers let’s examine the typical merchant cash advance funding process. This is the generally acceptable process to getting deals funded:
1. A conversation is had with a business owner either via direct or inbound marketing.
2. The business owner is sent an application and instructed to complete the application. He or she is told to send the completed application back along with the last 4 months business the businesses’ bank and /or merchant processing statements.
3. Sales organization will persistently follow up until the application and statements have been received.
4. Sales partner will make a quick evaluation of the business to determine which funder(s) to send it to.
5. The deal is sent to selected funders.
6. Approvals and stipulations are sent back to the sales partner.
7. Sales partner then conveys offers and stipulations to business owners.
8. Business owner selects an offer and sales partner requests contract from funder.
9. Sales partner sends contract to business owner and informs the business owner of the stipulations.
10. Sales partner obtains contract and stipulating documents from business owner and sends them to funder.
11. Funder conducts final due diligence and wires business owner.
12. Sales partner is paid.
The parts of the process that are completed by the sales organization have been noted in bold. As you can see, sales organizations do quite a bit of the legwork to get a deal funded. So, as long as the demand for merchant cash advances continue to increase, as new sales reps to the industry proliferate, the savings funders gain, and the money they derive from those savings will increase exponentially.
Casting that aside, lets examine some longer-term affects this process will have on the broker market.
If the process remains the same and there continue to be more brokers entering the market who do not have the benefit of having their time saved, then more brokers will make less money. The overall pool of commissions paid to brokers will increase no doubt, but on an individual basis, brokers will all stand to earn less. Funders will continue to benefit from the time being wasted by brokers through a less than efficient process. To be clear, I don’t think this process was designed with this much foresight back when the industry began to really blow up in the mid zeroes, however, such as it is the adage; “if ain’t broke don’t fix it” could not be more true if you are a funder in todays’ merchant cash business.
If you are anti-technology and choose to operate under this process, then perhaps you may want to consider doing all you can to ensure that the process as profitable as it can possibly be. What’s the solution? Simple; put money on the street.
Current industry trends suggest that it will be exceedingly difficult to actually grow a brokerage business exclusively based on the commissions you draw from funding deals. You will have to put your money on the street in order for your practice to grow. There are even lead aggregators / generators who cherry pick the best leads to either fund or co-fund with partners while selling off the “scraps” to brokers like you. There are a few approaches you can take, I’ll discuss the most common strategy. Later, we will explore in depth our approach — what we refer to as “The Buynance Strategy.”
Syndication
Sometime during the mid to late zero’s funders began allowing sales organizations to participate in merchant cash advance deals. Funders have commonly referred to the participation in deals by originators and brokers as syndication. Doing so made total sense as funders enjoyed lower default rates and brokers made more money. The logic is that if a broker has his / her money in a deal, that broker will do the right things on the front end (customer acquisition) all the way through the life of the deal. That broker may be compelled to focus on sourcing deals of the best quality while also aiming to provide service during the payback period to keep the relationship strong.
When this practice began, it was a service offered by a few funders to select partners. Now, this practice is commonplace. If you are entering the business and want to maximize the amount of money you make; you would be wise to focus on working with, and originating for funders that will allow you to put your money into deals.
The Different Ways to Make Money In Merchant Cash Advance
For this example we will explore the three ways to make money from merchant cash advance transactions, “The Buynance Strategy” will be explored in depth later). Here are some assumptions you should take into account:
· Average deal is $35,000.
· Average factor is 1.39
· Average commission is 8 points on the funded amount ($35,000).
· Zero default rate.
· Utilities, labor, and customer acquisition costs are not included.
1. Drawing Commissions:
· 100 Deals Funded * $2,800 Avg Commission = $280,000 earned.
2. Rolling Commissions Into Deals
· 100 Deals Funded * 2,800 Avg Commission * 1.39 = $389,200.
3. Co-Funding:
· 100 Deals Funded ($1.75M) * 1.39 * — $1.75M = $682, 500.
· + 100 Deals Funded * $1,400 Avg Commission = $140,000.
= $822,500.
As you can see, when you co-fund a deal you also earn commission on the half that you do not fund while earning a return on investment on the half you do fund.
Companies that offer syndication opportunities set it up this way. When you co-fund a deal, you have your cake and eat it too. You earn roughly 3x more than you would if you just drew a commission check. If you come into the industry focused on “graduating through the levels” — you can get to a point where your business actually grows even if your customer base stays flat.
