This is how a Merchant Cash Advance Broker can Rake it in
A merchant cash advance broker operates according to a straightforward principle. Find those who need funding and the funders who can supply the funds, put them together, and skim a commission from each deal. That’s about it, but needless to say, things are not as simple as they seem.
Merchant Cash Advance Broker
As an independent sales broker, you are incredibly valuable to the funders, perhaps more than they realize. One only needs to look at the role of a broker in a typical cash advance funding process to see how valuable they are:
- First, the broker starts a conversation with a business owner. The business owner may not even be actively looking for funding, but it’s the job of the broker to let him or her know that it’s available, as virtually all businesses could use external funding to grow.
- If the business owner agrees to obtain funding, and let’s assume he or she does, the broker sends in a merchant cash advance application. Besides the application, the business owner has to submit their bank statements and merchant processing statements for the previous 4 months. The broker needs to communicate constantly with the business owner until all the paperwork and due diligence is done.
- Once all the initial paperwork is over, the broker gets the proposal to potential funders, who would reply with an approval and stipulations, or a rejection. The broker would send the approvals to the business owner, who should select the best offer if there’s more than one approval. After the selection, the business owner gets the merchant cash advance contract along with all the stipulations.
- Of course, all of the contracts and documents are first received by the broker then forwarded to the business owner. When the final due diligence is done and the business owner receives the funds, the broker gets a commission.
It is obvious that it takes a lot of work, communication, and going back and forth with the broker between the funder and the business owner until the deal is completed. Regardless of these difficulties, the need for merchant cash advances has been on a constant rise and more and more people are looking for ways to get into the business.
The Growth
As the industry grows, the number of deals and the total amount of funding are not the only things that are growing. More and more people are trying their luck as a merchant cash advance broker.
So more brokers are doing the same sort of work and the commission pool may not increase as quickly as the number of brokers in the business. The result is inevitably less money going to each broker on average.
On the other hand, the funders will stay unaffected by this because they will have more brokers at their disposal, doing the same kind of work which may only increase their earnings. When the industry started booming in the early 2000s, apparently few people thought it would become so popular and the merchant cash advance process did not reflect the contemporary technological advances.
Nowadays it is becoming increasingly difficult to move your merchant cash advance business from square one only by the commissions that you receive from completed deals. The fact that there are certain technologies or organizations that can sift out the best deals and leave you with scraps doesn’t help either. This could eat into your commissions and leave you scrambling for good deals, especially if you are new to the business.
However, things are not all bad and there are ways that can help you earn a sizable income in the merchant cash advance business. Syndication is one of those ways that may make you happy and rich in this industry.
What is Syndication?
Around the late 2000s, brokers were allowed to get into the merchant cash advance game as funders or co-funders. This was a smart move by the funders because the default rates on merchant cash advances became lower. This is likely because the brokers became more diligent in their screening for they suddenly found themselves having their skin in the game, so to speak.
The syndication move is rather logical.If the broker has an investment in the contract, he or she will make sure the deal follows through smoothly. The broker pushes hard to find the best deals and gives premium customer service during the time of contract.
How to Actually Make Profit?
The math will show that you can maximize your profit as a merchant cash advance broker if you put your commissions to work by reinvesting the money as a funder. Some basic merchant cash advance assumptions should apply before we actually explain how it all works.
- We will assume an average deal of $40,000 and the commission is 8%. In addition, we will assume a 40% return on the merchant cash advance.
- For simplicity’s sake, we further assume a default rate is zero and disregard the broker’s overhead and other costs.
- Getting the Commissions:If you are able to secure 100 deals at an average commission of $3200 ($40,000 x 0.08), you get a total earning of $320,000. Sounds tempting right? But it can get better.
- Rolling the Commission:If you invest the commission back into a deal, the math gets better. Add 40% to your earnings above and you get $448,000. However, things can get even better from here.
And that’s how you’d get ahead as more brokers join the fray. In fact, rolling your commissions into funding doesn’t mean that you will stop earning more commissions. You can be a co-funder, in which you’d still earn a commission on the portion funded by your co-funder.
Conclusion
To put it simply, funders that allow syndication offer you a piece of the pie that is hard to resist.
Technically, within a few years your earnings can grow to three times higher than what you’d earn from straight commission scheme. If you are ambitious enough, you’d put more and more money to work until you reach some serious investment level where you wouldn’t have to stress about your customer base.
