The first deal I sold came with a factor rate of 1.49 over 80 days. The client (an autobody repair shop) was borrowing $30k and paying back $44.7k with a daily payment of $558.75. The client had 2 other positions with lenders that are very well known, industry-wide, for $25k and $12k. He was paying $483.33 on the first and $450 on the second, daily ($30k at a 1.45 over 90 days & $25k at a 1.44 over 80 days respectively). At first, I marveled at how he could possibly be able to take more money, when he had literally taken the first 2 positions less than 2 months before. My “boss” explained that “this is the way it works.
They take money believing they will be able to turn it (the business) around, or some guys take the money and do something else with it, gamble, mortgage payment, kids tuition – you name it. That’s why the term is so short, and the rate is so high – it’s all very risky on the lenders end.” I took the explanation, nodded and sold the deal. My primary concern was closing my first deal not dissecting the nuances of the MCA space according to my “boss”. However, as I started to get more and more offers, I noticed something peculiar. No matter if the client had one, two, three or no existing positions, the rates always came in the same – 1.45 – 1.49 – even if the client had a “golden package” status (this was customary parlance at the “firm” for a client that was showing considerable cash flow monthly, along with steady reserves that never left the account).
Further, I was told that the buy rate – the rate that we were given to up-sell the client from, was always 10 “points” less than what we would be selling the deal for. If the client wouldn’t accept the deal at the full ten points, we could always go lower to get the deal done. This seemed strange to me. Why, if my “boss” had such great relationships with these lenders (my “boss” knew all the owners of the lending firms personally, or so he said), were the buy rates so high? It was only after doing some investigating of my own, that I realized what was going on – a discovery which galvanized my resolution to leave the firm and hang my own shingle.
My “boss” had negotiated his own buy rates with the lenders ahead of time. All the buy rates we (the closers and chasers) received were already inflated by 10 points – meaning we were upselling the real buy rate by 20 points! That’s the reason for the 10% conversion rate my “boss” readied us for, only 10% of the people would be desperate enough to take such a rate – especially so with leads that were recycled over the last 3-6 years. Had I been able to sell the client on a competitive buy rate – like most of the other firms had offered – my closing ratio would have been 30 – 40% – not 10%.
Another point my “boss” made ad nauseam, speaking from the position of a syndicator (which he reminded us constantly – we were a boutique lending hub, a direct lender, not a broker, since he syndicated on deals), was the inherent risk in lending money to “these clients” (any small business owner he syndicated on a deal for). He explained that, “the money costs a lot because of the risks of default”. My response, “why not have the lender use collateral, thereby mitigating risk?” Him: “It’s too involved and too time consuming, besides, “I make a ton of money with a 60 – 80 days turn around funding it like this, unsecured.” I quietly smiled inside.
Did he not realize that he was speaking from both sides of his mouth? The rates must be high because of inherent risk (they could default at any time was the common refrain), but it’s not so risky that you go the extra mile of protecting yourself in case of default through collateral? I realized 2 things at that instant – my “boss” was no Rhodes scholar and the only reason for the rates to be so high was because they could be – pure, unadulterated, greed.