Updated: Nov 10, 2020
Questions on whether a MCA funding company is truly a direct funder have been asked repeatedly over the years.
How do you verify if a funder is direct? Will they send your deals somewhere else to get funded?
Do they fund directly from in-house and also broker out deals they originated from their own sales team?
Are they part of a group of multiple different companies that fund under one umbrella entity and pass deals around?
These questions will continue as new entrants enter into the MCA space so I'm going to get into why knowing whos who is important and how to handle things on either side of the equation.
Who is considered a Direct Funder
For this article, when I refer to funding companies I'm only referring to the MCA product, which is a purchase of future receivables at a discount. although the same methodology could be used for other loan products.
So starting with the basics, when operating a funding company you need a source of capital to finance the deals.
That capital can be from a wide range of sources, even in some cases self funded, but most often from groups of investors to institutional investment banks to hedge funds, and everything in between.
As a direct funding company, the funds available would be used to transact financing agreements with merchants for a merchant cash advance.
Many funders operate through the direct-to-merchant channel but will partner with ISOs, or individual loan brokers, to funnel submissions to them for a large part of their business.
Either way, if the funding company is the one on all the contracts, is dispensing the funds, collecting the payments, and -as needed- filing court documents, then that funding company for all intents and purposes is a direct funder with few exceptions.
This is not a legal opinion. Its an opinion simply based on how funders operate.
Something that has become very common in the industry are ISOs who partner with a funder to become a 'White Label' distributor for them, which essentially is a system which masks the roles involved and allows for the ISO to build a brand based on appearing to be the funding company.
White labeling is done in many other industries with few issues.
While it doesn't have to be an issue in the MCA or commercial finance space, it has become one because of the deception involved.
This happens when an ISO presents itself as a direct funder but everything is really being handled by another company who is the actual direct funder.
That actual funder provides the underwriting and offers, then the contracts are labeled with the ISOs name, logo, or likeness while the direct funders name is used as little as possible.
There is even an option to have the ISOs name showing as the company debiting the daily ACH in the bank activity when collecting payments form the merchant.
However, one thing most White Label ISOs cannot do is have the money show as deposited from them to the merchant. Thus the true funders name will show up in the bank statements.
So all in all, a full White Label service offering from a funder can be so well done that only few details would reveal the true nature of the funding relationships.
How should a company prove they are a direct funder
When a company that is not well known claims they are a direct funder, there is usually a request to prove as much for any broker who might be inquiring to sign up with them.
An ISO agreement alone doesn’t prove they are a direct funder.
Read the ISO agreement carefully!
Just recently a company sent me an agreement that mentions "Affiliates" in connection with reviewing documents for a submission and also states " purchases and outsources the purchase of, future account-receivables".
When asked what that meant exactly, the response was they fund under different entities but everything is in-house.
Seems having to fund from different entities is unusual although likely legal, but I wouldn’t trust them especially when they are reluctant to further clarify or identify other parties or entities.
The following are a few ways to prove being a direct funder:
Provide copy of a voided contract. This will show the responsible parties involved.
Give direct links to court records for previous filings against debtors.
Provide a merchant bank statement showing where a deposit for a funding took place and ACH withdrawals.
If a ‘funder’ does not want to supply any of this information then you may want to reconsider signing up with that company.
Larger, more well established companies may not jump through any hoops given they feel like its already known what they offer.
However, really any funder that has been around less than a few years should be happy to supply this information.
Our process for verifying direct MCA funders
For funding companies we aren't too familiar with we use a combination of ways mentioned above before adding companies to the Funders List.
We request a copy of the first 2 pages of a voided contract..
We search court records. If we cannot find them in court records we may request a bank statement showing a deposit to a merchant.
Also we might request an ISO agreement which as mentioned above does not prove anything 100%, but we do that to review it as it could have details that would rule them out as being direct.
White labelers can have the ACH daily withdrawal line item in their name so its important that you see who deposited the money.
Most of the funders on our list we put on there without needing verification because we have worked with them in some capacity or verified through experience otherwise.
If we come to find out a company that is listed who should not be for whatever the reason, we will review and gladly remove them from the list.
Keep in mind though that decision is based solely on the services offered not the quality of the service.
We depend on you, members, to rate and review vendors to provide feedback about their quality.
Add Your Business to our list
With so many funders out there it is hard to keep our Funders List up to date, especially given the current Covid-19 crisis.
There have been several funders that have stopped funding and some new ones have appeared. Others who were ISO shops previously but moved into funding for the majority of their business.
We have added a page on our site to request your business to be added to the list of funders or any other vendor list we have. It only takes a minute to fill out so you can submit anytime.
It will only take a day or so before its up. If added to the funders list you can then start requesting ratings of your company and promoting those high ratings!
The classification for being a direct funder should not be that complicated.
However, several players that have entered the market lied and deceived brokers when onboarding new partners to get short term rewards, whether that be just to get some submissions to then afterwards cutting them off, or refusing to pay commissions, or otherwise scheming their way to making money.
This isn’t the majority of the businesses at all.
Most direct funders doing MCAs are transparent in what they offer.
They know their reputation needs to last as word travels fast in this space. They will even sometimes offer more insight to their company on different PR releases or on social media platforms, creating videos of their operations, so they can increase that trust factor.
So next time you come across a company that claims they are a direct funder, feel comfortable in questioning that, as you know exactly how to handle it.