In my very first sales experience, my book of business was compared to a bathtub half full with water.
Additionally, I was told that this bath tub had no plug in the drain, so water was continually escaping from it.
The riddle was finally completed with the question, “How therefore can you maintain water in half the tub with the constant outflow of water?”
The answer was obvious once I thought about it……I have to make sure that water was steadily and continually running into the tub from the faucet at the same rate by which it was exiting down the drain!
With that thought in mind, we now see that sales/marketing is an ever moving target. The factoring client that you have securely established with ABC Factoring Company today may have just been offered a factoring rate less than he is paying now, and will be gone tomorrow. If he moves to that new finance vehicle, so moves your commission as well.
Your pipeline of new transactions is vital to your financial survival as a factoring broker!
The question then should be asked; do I want to pursue the “elephant” sized deals that will occupy huge amounts of time, require highly competitive pricing and have less than a 10% chance of closing?
Think of that bathtub getting lower and lower in water volume. The answer by now should be obvious. The smaller less competitive, higher priced (more commission) transactions are truly the low hanging fruit. Let’s look at the math.
Suppose you manage to bring to a factor a client doing $1MM in monthly sales and he is eager to factor the entire portfolio of invoices. A deal of this size is not a slam dunk to underwrite as the funder is going to make sure all “i’s” are dotted and “t’s” are crossed.
Where will a transaction like that be priced?
On a discount basis, the fee certainly cannot be any higher than perhaps 1.25% to 1.375% on a monthly basis (probably pro-rated to a daily discount fee). So, you’ve consummated a one million dollar deal and you are getting (based on a 10% commission of gross fees) $1,375.00 in monthly commissions. The factor probably took the better part of a month to close the transaction.
Suppose you provide the factor with the same monthly volume of business, however the source was 20 transactions of $50K per month. Transactions of that size are quick to close, and can easily be done in two weeks. Where is the factor pricing a deal of that size? Even if the factor was very aggressive in pricing, it would not be too far from about 2.75% to 3% monthly discount fee (very aggressive for a deal that small, however I am trying to make a conservative point). The math then works out to be $150 per deal for the broker X 20 deals = $3000 in monthly commissions.
Now let’s look at the bathtub losing its water…..if your elephant client goes down the drain (which is highly likely due to the competitive nature of the transaction and other companies being very interested in swiping that deal) you’ve lost the full $1,375 per month in commissions. However in order to lose the same $1,375 per month with the 20 smaller deals you would have to see approximately 9 of your clients go through the bathtub drain.
How likely is that?
Smaller companies find it almost impossible to acquire financing, and they tend to stay with factoring much longer! Oh, and by the way….even if you did lose the 9 deals, you would still have remaining income of $1,625 per month, still more than the one million dollar client would have provided in revenue for your business.
As a factor, I look at my business that way as well. By now readers may know that Xynergy Healthcare Capital focuses on medical factoring. My brokers readily ask; Fred, why not hospitals?
Putting my risk per transaction, and my exposure to high concentrations in the larger clients (the hospitals), I do not see the risk/reward relationship tilting in my favor. My approach has always been and will continue to be “fast nickels rather than slow dimes.” When I put $2MM out in the street for factoring transactions, I would rather have 10 to 20 (or even more) factoring clients. My fees are larger my risk is smaller and more manageable, and my brokers are much happier (more $$). Factoring Brokers close more deals, and ultimately, that’s the name of the game! As always I welcome your comments.
About the Author: Fred Leder has been actively involved in the specialized healthcare financing niche for over a decade. Xynergy Healthcare Capital LLC is a factoring organization focused on small to mid-sized healthcare providers nationwide. For more information contact Fred at (954) 489-6460 or by email at fleder@xynergyhealth.com.