[jotucker1983]

Percentage of gross sales is only one part of the equation. Average daily balance is a more useful indicator in determining a merchant's ability to afford an advance. What good is giving an advance where monthly debt service is 15% of gross sales if he only shows an average daily balance of $100 and has 1 or 2 NSFs per month? He clearly can't afford the advance. Conversely, I've seen merchants easily handle payments that eat up 30% of monthly gross because his average daily balances are very high. Each merchant's situation is different. Some merchants are financially astute and responsible. Some are one bad month away from insolvency. Therefore, there are no cookie cutter, one size fits all underwriting rules.

Good underwriters take a holistic approach and look at the whole picture when deciding the maximum approval amount. The 15% rule is only a guideline based on historical performance of similar merchants in a funder's portfolio, not a hard and fast rule. It is also a rule that helps impose discipline on the underwriting process and mitigate the funder's default risk. The broker's job is to ask the right questions, learn the actual profit margins, find out if the merchant can really afford the advance and then guide him to the best solution for his situation.

Excellent post, underwriting includes a variety of aspects such as credit scoring, bank balances, current liens, if the client is behind on their rent, etc., but I want to highlight something you said here:

The 15% rule is only a guideline based on historical performance of similar merchants in a funder's portfolio, not a hard and fast rule. It is also a rule that helps impose discipline on the underwriting process and mitigate the funder's default risk.

My argument is that default risk is why 10% to 15% of annual gross sales (and 15% is pushing it, it's usually 5% to 8%) is usually the amount approved. It factors in the ability of giving the merchant enough "room" to cover other required operational expenses, as the goal of the 1st position funder is not to just lend out....but get the money back that they lent out.

I just feel sorry for the 1st position funder that is stacked with up to 6 positions on top of its program, with the client having to make other arrangements to finish the payment cycle.

Stacking is how a lot of the broker shops today are staying alive, let's just be honest about that. But the reality is that you can't survive on that alone because despite what anybody thinks....more regulation is coming to this space based on the media attention provided along with the consolidation of the alternative players with the conventional platforms. The space is no longer competing with the banks, it's mainly working alongside them now.

[WestCoastFunding]

I just feel sorry for the 1st position funder that is stacked with up to 6 positions on top of its program, with the client having to make other arrangements to finish the payment cycle..

Don’t feel sorry for them. They’re most likely “stacking” on a bank, SBA lender or asset based lender. In fact, I believe they’d prefer to stack those guys at times.

[jotucker1983]

Don’t feel sorry for them. They’re most likely “stacking” on a bank, SBA lender or asset based lender. In fact, I believe they’d prefer to stack those guys at times.

Got it, but the only difference is that the conventional loans like the SBA programs are at conventional terms. We are talking less than 10% in interest with terms that are 5 years to 10 years. We are also talking about an approval amount that's of reasonable means and a payment schedule of very reasonable means.

So a 1st position A/B funder going in there with that SBA loan already in place for example, still gives the merchant a lot of breathing room, despite the fact that the payback cycle is 6 to 15 months give or take.

But when you throw 6 positions on top of that, with terms from 4 to 7 months each, that is where we start to potentially get into trouble here.