This article is being written based on an experience we’ve had acting as an ISO for one of our clients, meaning we brokered a file to another financier in the MCA space! Out of courtesy to that lender we will not mention their name in this article as it is never our intent to disparage any firm we work with, or hurt their business in anyway! Our goal, with this article is simple
to highlight a prevalent issue in this industry and propose, in broad brush strokes, what should be done to remedy this issue, industry wide!
Recently, we submitted a file to a financing company on behalf of one of our clients, upon review of the file we received an offer for financing and stipulations that needed to be met prior to funding, we worked diligently with our client to meet those stipulations and propel our client over the finish line. The financing company, cleared the file for a “funding call”, but due to the fact that is was late Friday, they were not able to fund and decided to push funding to Monday. Over the weekend, the financing company informed us that the had discovered a UCC Lien that was two years old and because of the fact that the system didn’t show a disposition on the file, because it was two years old, they needed us to go back to the client and get written clarification on what the disposition was because they didn’t see it.
So, basically, after giving our client the impression that they would be receiving their funds on Monday morning, they instead, needed to come up with additional documentation because the financing company failed to underwrite the file properly to begin with. Thus, this situation causes reputational harm to our firm, as it makes us look incompetent and unable to perform at a level of excellence that a client, who has complied with their stipulations, who has trusted us with their personal and business information, should come to expect! Sadly, this isn’t the only financing company in this industry that has made errors that have hurt ISO’s and we aren’t the only ISO in the industry that is being affected regularly by the financing companies that we work with. So, then, why is this happening?
Unfortunately, a lot of financing companies that crop up in this industry are ran by individuals who have never worked in a major Wall St. Investment Bank, nor have they worked in the credit division of any major Federally Chartered Banking Institution, thus, they are not familiar with standard underwriting policies and procedures, nor are they familiar with uniformed financing standards and risk management techniques. Most financing companies are simply making it up on the fly, so to speak, and thus; there is no consistent industry standard of acceptable, dependable, practices that can be relied upon. The key for financing companies in this industry, is simply to “lock step” with major banking institutions policies and procedures, as they are the standard and they are clear. Without this, it will be impossible for this industry to grow beyond what it currently is.
Without following a clear set of practices that are standard across the financing space, major Wall St. firms cannot, with confidence, work with MCA financing organizations, nor will they be willing to make markets on these products; without secondary marketing, there is no real liquidity in this space and thus all financing commitments are held on the financing companies balance sheet, which creates systemic risk to the financing company. Without secondary marketing, this industry cannot grow and without a uniformed set of underwriting and financing standards that resemble institutional standards, we will continue to see spoty underwriting and face reputation risk, not only as ISO’s, but as an industry. We are in a the small business market, which is driven by consumer based financing.
Without a strong industry reputation, we run the risk of regulators getting involved, which only increases cost and lowers profits. We, as an industry should take a long hard look at the way we are doing business and strongly consider modifying our practices, so we can continue to grow and thrive in this industry!