Independent sales organizations and sales agents are finding that offering merchant cash advances and small-business loans can provide a lucrative sideline. But as with any enterprise, entrepreneurs who are focusing on the upside of the business should also develop a keen understanding of the pitfalls that can accompany a foray into alternative finance.
Many ISOs are making $10,000 to $200,000 a year, or even more, by promoting alternative funding vehicles to their merchants.
It’s a perfect fit for acquirers to offer funding because they already have close relationships with small and medium-sized merchants. The funding can make those ties even stronger and thus keep merchants from leaving for another ISO. At the same time, the funding’s meaningful and necessary for merchants because banks have become notoriously reluctant to assist and lend to small businesses in the wake of the 2008 economic downturn.
Due to the growth of alternative lending there has been a recent influx of new brokers that has heightened the need to proceed with caution. Below we will outline what to look out for when working with merchant cash advance or business loan firm.
Stacking. Out of ignorance or because of a disregard for sound business practices, some brokers have begun “stacking” loans or advances. In other words, they pile multiple loan obligations upon merchants, outstripping their ability to meet them. One or two alternative-finance deals at a time should be the limit. It spells trouble when merchants are committed to devoting much more than 25% of their revenue to debt service. If your broker wants to stack more debt on your merchants than they can handle, look out.
Fraud. And it gets worse. In their haste to make as many deals as they can and to make them as quickly as possible, some brokers “coach” merchants on how to defraud alternative-finance funders. Brokers can advise merchants to falsify bank records to pad revenue or hide overdrafts. Sometimes, brokers urge merchants to persuade landlords to vouch for them even when they’re behind in their rent. Brokers can even suggest that merchants direct a bank to stop making payments on their obligations.
Lack of key relationships. Meanwhile, brokers who don’t have solid relationships with top management of funders – the people who put up the money for loans and advances – can’t always get the best terms. In other words, brokers who don’t have access to top management at multiple funders find themselves at a distinct disadvantage and have to settle for whatever they can get.
Unfair referral fee/commission split. Some brokers might do an adequate job of procuring and transferring funds but lack generosity in compensating ISOs and agents for referrals. Acquirers work hard to cultivate their merchants and they deserve to be rewarded for referrals. Yet some brokers offer only an unfair 2% of the amount funded when a generous 4% to 10% makes more sense.
Despite those pitfalls, savvy merchants are finding skilled, reputable, brokers who can become worthy partners. Above all else, seek brokers with strong ethics and integrity. When choosing a broker, perform a background check and consult with the Better Business Bureau. Expect an impressive LinkedIn page. Look for varied, high-level business experience that helps a broker understand a merchant’s needs, desires and challenges.
Find brokers who make themselves available up to 16 hours a day to cell phone calls, text messages and email messages from you or your valued merchant. With all the moving parts of the alternative-financing business, a good broker is ready at all times to employ the right expertise.
Joseph V. Ialacci is president of Lion Capital Group LLC.