Updated: Dec 14, 2022
One of the most important parts of the merchant cash advance sales process is negotiating an offer the merchant will accept.
Whether you are on the funder or the broker side, negotiations between the two for sellable offers are a daily routine.
The ones who understand this process the best will have long-term success in funding.
I am going to discuss this process mostly from the funder's perspective. Brokers will have their own strategies for doing things but many of them we’ll touch on as it correlates to what funders are doing or should be doing.
Really the first part of negotiations is to take a step back and figure out if you are dealing with the right ISOs to accept submissions from.
If you sign up just anyone who uses the shotgun approach to send all their files to you and 10 others, it will be a waste of time. Then they will complain you don't ever send offers even though you gave them your underwriting guidelines yet they failed to put much of an effort into seeing if the deal fits your box before sending it in.
The ISOs who understand your underwriting guidelines are where you are going to put out your best offers most consistently.
Part of larger strategic decisions for funders is also how often they want to max out their offers. When maxing out offers it leaves no room for negotiation which then puts pressure on the broker and the merchant either accepting it the first time or moving on.
That strategy will lead to the frequency of having to negotiate with brokers. If your offers are flexible most brokers will ask for better terms EVERY time especially if it's going to result in them making more commission.
You will come across some brokers who ask for better terms ONLY when they need to however that seems to be few and far between. Those are the brokers you need to develop a good relationship with as they are showing integrity.
Brokers rarely down-sell points unless they have to, depending on the other offers they might have for a merchant. After all, they want to get paid as much as possible while also getting the merchant the capital they desire.
This is part of the business but often the part where misdeeds or shady business practices come into play.
Let us go through a quick example of how an offer is presented and negotiated:
Offer sent to ISO. Terms are 100K, 10 months, 1.24 buy rate, and max upsell 12 points.
Broker reviews, then respond to Funder saying what he needs to get the deal sold, ex: 120K and 12 months? He can say he has additional offers or even show the funder the actual valid offers from other funders. This typically helps underwriting as it proves the offer exists. Often all parties aren’t giving all the information upfront, or to be more direct they are lying.
ISO rep from funder discusses with underwriting to see if the offer can be revised to meet the request of the broker.
Underwriting decides they can meet halfway and improve the offer to 110k, 11 months but the buy rate goes to 1.26 since it's an additional month.
If the broker doesn’t have any better offers he will try to sell it first at max commission but keeps the possibility of down selling points to get the deal done if need be. Otherwise, the broker will tell the funder that the offer isn’t good enough or any number of reasons why the merchant won’t move forward.
A final follow-up is done on either side. Often someone is not being totally straightforward in their negotiation or honest regarding the terms needed to close the deal. If there is any way to sweeten the deal or get an exception then that's the last chance.
Frequently merchants will wait until they have exhausted all possibilities, and if they move too quickly that also sometimes is a red flag. We won't cover every situation as there are many, but the idea is that once the merchant is satisfied they have accomplished their goal of attaining capital and not been sold or taken advantage of, they will move forward with the best offer.
So there offer many different factors, strategies, and policies involved with providing the best offer to a broker. Even getting as much information on the initial submission like existing offers, if they are going to pay it off early, etc... as helpful with everyone getting what they want.
What needs to happen for a successful long funder-ISO relationship is a level of trust in how offers are completed all the way to funding a deal that pays back on time. This is built over time.
There are performance metrics as well that funders will use to give ISOs priority underwriting, special pricing or exceptions, faster approval times, and other VIP offerings if that ISO funds a high volume of units or dollars with that funder.
Some of those metrics are conversion ratio, monthly funding amounts, loss ratio, and total defaults. (read more about those in our KPIs article.)
If ISOs aren't closing offers at a reasonable rate if they are argumentative, disrespectful, and dishonest, then why would a funder continue to work with them given those issues? There are too many ISOs out there to work with to continue to spend resources on those kinds of ISOs.
Just the same for brokers, if a funder isn't providing you with offers you can sell, then find the ones who can and build that relationship. In the long run that's what is going to make the difference. This concept works in many other industries if not most.
To conclude, if you aren't analyzing how to put out offers that brokers can close and the negotiations of closing the ones you do put out, then you are missing out on funded deals. This goes for brokers too, with regard to developing relationships with the right funders and being respectful while negotiating offers with a high standard.