Should Factoring Intermediaries Double-Broker Deals?

The subject of double-brokering opportunities has been a hotly debated topic since I joined the industry, over a decade ago. The gist of the argument is as follows: factoring companies believe that brokers should not “shop” opportunities and place them with multiple factoring companies. On the other hand, many (but not all) brokers want to be able to place deals with two or more factors. Let’s look at both side of the argument.

Summary: The factoring company point of view

For several reasons, most factoring companies don’t like brokers placing the same lead with multiple factors. First and foremost, it increases their competition. It’s natural and understandable that companies don’t like the fact that they have to compete against other companies. However, competition is a key piece of the free market.

However, there are other reasons. Double-brokering creates additional work and expenses for the factor. This opportunity takes time away from their sales and underwriting staff. This burden applies to all factors competing for this opportunity, so this effect is multiplied. However, one can argue that this activity is a normal cost of doing business and that it should be absorbed by the factor.

Summary: The factoring broker’s point of view

A number of brokers, on the other hand, like to place prospective clients with multiple factoring companies. In principle, brokers like this approach because competition allows clients to get a lower fee. However, this strategy also increases their chances to close a deal which, in turn, is good for their bottom line.

In some cases, brokers place a single opportunity with a large number of factors. The logic is that placing the deal with numerous factors greatly increases their chances of closing even more deals.

How about the client’s point of view?

So far, I have summarized the most common points of view in this argument from the factor’s and the broker’s perspective. One noticeable aspect of this discussion is that few people talk about the client’s perspective. I have always been surprised about this omission. Actually, as a factoring intermediary, this is the only point of view I care about.

What do clients want? Clients want to work with a factoring company that:

• Helps them with their cash flow problem
• Provides a reasonable cost
• Handles advances and rebates quickly
• Handles clients with “silk gloves”
• Has knowledge in their industry
• Handles tricky situations skillfully

What is a broker to do?

In my opinion, a good broker is one that helps its client get financing from the factoring company that can help them the most. By the way, this goal is fairly difficult to accomplish. You need to know your client’s requirements and your factor’s capabilities, and you must try to match them as best you can.

In some cases, clients have difficult or unusual scenarios. In other cases, the client’s business has a high underlying risk. In either of these cases, it makes sense to place the client with a couple of factors to try to get them funded. If you take this approach, I recommend that you disclose to all involved parties – including the factors – the fact that you are placing the client with multiple factors. I find that being open and direct works well.

However, in cases where the client’s needs are straightforward, your best bet is to send the client to the factoring company that you believe offers the client the best value. Sending the client to more factors can actually backfire.

Here is an example of how double-brokering can backfire. Let’s say you refer a client to four different factoring companies. Your client will actually have five points of contact – you and one for each factor. The client will need to keep track of four separate application processes. They may need to fill out four different applications and submit four similar sets of underwriting documents. They will also need to negotiate four different proposals. Finally, if all goes well, they will need to review multiple contracts and select the best option.

Although the above scenario sounds nice in theory, in reality it can become an administrative nightmare for the client. Keeping track of that many negotiations at the same time is difficult, especially for small businesses that have only a few employees.

Furthermore, imagine if you have six prospects in that same scenario. Presumably, you – as the broker – could be dealing with 24 different applications, proposals, contracts, and negotiations. Good luck managing that and keeping everyone – especially your clients – happy.

Sending your clients to the factor you believe is best for them also increases your value to them. If they wanted to choose five different factors, they could have simply searched the Internet and submitted five different forms. However, they chose to work with you because they wanted you to help and guide them through the process to make it as seamless as possible.

About Marco Terry
Marco Terry is the managing director of Commercial Capital LLC and Commercial Capital LLC (Canada), a leading factoring and purchase order financing intermediary. He can be reached at (877) 300 3258.