In the revenue-based financing (RBF) industry, independent sales organization (ISOs) play a pivotal role in ensuring that the merchants they evaluate and refer to partner funders are viable and poised for funding. This article aims to inform brokers about the best practices for evaluating files to fit your funder partner’s credit box, emphasizing the critical importance of thorough opportunity evaluation in the revenue-based financing landscape.
How to Evaluate an Application for Revenue-Based Financing
Evaluating a file’s viability for revenue-based financing (RBF) starts with evaluating a few key details including industry, average daily balances, number of negative balance days, state of incorporation and how levered the merchant’s revenue is with one or more existing financing obligations.
Where is Your Partner Funder Disclosure-Compliant?
Some funders will be restricted by commercial lending disclosure regulations, so it is important to know in which states your partner funder is compliant. Routing merchant applications to funders from states in which they may not be disclosure compliant will lead to less conversion on your submissions. You must understand the type of files your funding partner can and can’t fund, otherwise, you may be wasting valuable underwriting resources and converting less funding.
Funder Industry Preferences Can Change
Brokers must prioritize understanding how the funder operates; if necessary, schedule frequent process and guideline conversations with your assigned underwriting team to gain insights into the funder’s file preferences.
Industry focus is one of the most important variables in a funder’s credit policy. Many funders will have very targeted industry focuses, with a variety of restricted industries that they typically will not fund or de-emphasize.
Industry preferences tend to be driven by a variety of reasons. Some funders may restrict certain industries due to historically bad performance, and others may be restricted due to political, industry or senior lender-related factors.
A good example is the transportation and trucking industry. Since the COVID-19 pandemic, many funders have pulled back exposure in the transportation industry while others have dialed up their fundings due to growing demand. Any RBF-focused ISO or broker must understand exactly the type of files their partner funder will price and prioritize.
Determine the Value of a Deal Before Submission
Effective opportunity evaluation mitigates risks for your funder and enhances the potential for conversions and performance. By understanding the key areas to focus on in the review of a bank statement, an ISO can evaluate a company’s financial health, operational efficiency and ownership structure.
Key variables to evaluate include:
- How many positions or obligations does the business currently have?
Some funders have a strict first-position policy. If your funder will not price or fund a file with multiple positions, keep this in mind before taxing underwriting resources with a stacked submission. If your partner funder prefers funding in the second position and beyond, keep this in mind when deciding which merchants to refer to which funders.
- Does the business have multiple negative days?
If a merchant’s last three months of bank statements show negative balance days, you can assume that most funders will likely decline the file. Revenue-based financing is a purchase of future receivables, if a merchant’s business bank account has a recurring negative balance in the last three months, that business may be sufficiently or over-levered and does not have sufficient revenue to qualify for revenue-based financing.
Conclusion
A quick review (scrubbing) of a merchant’s application for funding and the supporting documentation is an indispensable practice in revenue-based financing. By efficiently evaluating a business’s financial condition, market position, operational efficiency and risk profile, ISOs can make informed decisions that enhance conversion rates and add value to merchant prospects. Adhering to these best practices not only mitigates risks but also fosters confidence and trust in your relationship with your partner funder, contributing to the success and growth of the funder-broker relationship.
Brokers who excel in filtering their submissions to their funder preferences play a crucial role in driving the revenue-based financing industry forward, ensuring that capital flows to businesses with the greatest potential for success.
Joshua Karp is the senior vice president of Production and Revenue at CFG Merchant Solutions. Joining the company in 2015, Karp initially served as head of Operations, where he employed the independent contractor / joint venture model, built out the production team and architected the CFGMS systems and operations team to better serve the needs of small and mid-sized businesses seeking capital access.
