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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   July 2007

Rake in the Residual Income

The fees you collect from alternative financing can be the gifts that keep on giving

Competition is around every corner. As such, we have seen a marked increase in mortgage brokers broadening their offerings. Many of their business-owner clients seek working capital or other types of business loans to improve their current economic situation.

In addition to helping them, you can see residual income each month by making a sale once. Two important categories of loans that can bring you residual income streams are equipment financing and factoring.

Leasing equipment

The equipment-leasing industry is a $230 billion dollar industry, according to the Equipment Leasing and Finance Association, and it continues to grow each year. There are two subcategories of equipment loans that brokers can make.

The first is direct to the buyer. This is profitable — you can make as much as 8 percent of the equipment lease — but it is not residual unless that buyer is a growing company that needs equipment each year.

The second type of equipment lease is made directly to the equipment vendor. In essence, brokers become the vendors’ loan specialist for their B and C loans. You won’t get A-credit loans because they are adequately covered by banks and by the existing relationships the vendors may have. And D credits often are too difficult. But the remaining applicants are your sweet spot. You bring real value to a vendor by focusing on their B and C loans.

In developing this relationship with vendors, you essentially are creating a sales force with no overhead. As vendors’ customers need financing for equipment, they send you transactions. You become their in-house finance company. You help them increase sales while increasing your own profits.

Vendors typically send in five to 10 transactions a month; some might do more. You make a small percentage from each sale. In your first year, you can open three to five vendors like this.

Factoring

When a company sells a product or provides a service, it sends invoices and usually can wait 60 to 90 days to get paid. This can be a problem for business-owners that need cash flow for operations.

Accounts-receivable financing, or factoring, is probably one of the most-needed types of financing for businesses, especially unestablished ones. Through factoring, you can provide business-owners with financing in which the funding source lends them as much as 80 percent of the outstanding invoices. For example, at 80 percent of a $100,000 invoice, the company can borrow $80,000 to be used for the business until the customers pay their invoices.

Generally, you share the profits the lender makes on each account every month. The lenders generally pay you between 10 percent to 15 percent a month of their profits, which continues as long as your client finances with the lender.

If all your clients have $1 million outstanding each month, you will earn a percentage of that every month on that one type of lending. This is a great example of residual income: Make one sale and get paid for years.

The outcome

There are also many subcategories within these two types of loans, but it is important to understand that the real challenge is not making money or even selling the vendor. The real challenge is knowing what types of vendors to go after.

On the equipment side, for example, “yellow iron,” or construction-industry dealers, are bound to be more lucrative than copy-machine dealers. On the factoring side, you should target clients who issue invoices and need working capital.

To get started, you will need to spend the majority of your time on sales and marketing. The good news is that many of the resources you need are right under your nose on the Internet, at trade shows, in textbooks and at schools that specialize in this category of training. 


 


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