Updated: Nov 10, 2020
An Independent Sales Organization, ISO, within the business lending space is a company that operates as an intermediary between business owners and the funding companies that provide capital directly to them. The term is derived from the merchant services and credit card processing industry but has evolved into business lending.
ISOs will offer several financing products for businesses such as short term loans, merchant cash advances, and lines of credit. Some will still offer merchant services for credit card processing.
Employees working within an ISO are mostly sales reps, also known as brokers, who contact small business owners to meet a need for non-traditional financing that can be accessed swiftly. Other positions are admins, underwriters and the normal other small business operational staff.
Brokers use their connections with various direct funders to connect business owners with the right one so that as seamlessly as possible, the business owner gets the funding they need, the direct funder makes a profitable transaction, and the ISO makes a commission for being the matchmaker for the transaction. An ISO is only paid their fee or commission once a loan or other product is closed.
Independent Sales Organizations have played a vital role in the growth of the small business lending industry as they often act as the eyes and ears of direct funding companies which can help with underwriting and adapting to market changes.
Sometimes people refer to an ISO and a loan broker as the same but they aren't really. More accurately the ISO is the organization or whole company that functions as a middleman, a broker is a sales rep that is an employee of the ISO company. Either way the brokers that close the deals are the main driving force for revenue in an ISO.
Some ways they have impactful role:
1) Establish trust with the business owner and then leveraging that trust to sell them on a direct funder in the best position to meet their business loan needs. The goal being a long term client that renews several times.
2) They are the main communication between the business owner and the direct funder whether it be specific documents needed, questions about the business that need to be answered or negotiating the terms of the offer so that it will be a win-win for the customer and the funder.
3) They work with the funding company if there are issues after funding such as missed payments especially if it is still within the commission clawback period or early payoff requests,
4) Most importantly a good loan broker who is honest and does the best for the business owner and the direct funder becomes a positive ambassador for our industry at large which will only help all of us in the long run grow and become more profitable over time.
ISOs can come in many different shapes and sizes. The following provides you with a look at the most common sizes and operational setup:
1) The 1-4 person office: One or two person shops start small and many like to stay that way with just a few more people total. This type of operation is common for newbies or even veterans, and allows for little overhead and great flexibility. You can work from home, a shared workspace, or get a small office, but all you need is a phone and a computer to start. All ISOs will start their business by reaching out to various direct funders to sign agreements in order to submit their deals for funding. The next thing is getting customers, so sourcing leads from a variety of channels becomes huge priority and possible expense.
2) Medium size office: Typically between 5-15 people that on the smaller end each broker will work on their deals from initial contact to the closing and renewals, to on the larger end the office may have separate functions for reps who open the file and others who close it and do renewals. Also might have an admin who handles file submissions, offers, and handling of documents needed to close.
3) Large operation: For this article we use over 15 but usually 20-40 staff, where the owners have built out all of the technological infrastructure, file flow, job functions, partner agreements, funder matrix, lead sources, marketing and any other operational strategies. Often times this size office will participate in syndication(discussed below) on merchant cash advance deals or eventually get into directly funding some of their own deals.
An example of a larger operation organizational format would be:
-many different openers who cold call businesses or handle initial contact,
-then ‘chasers’ who speak to the merchant to collect documents and stipulations,
and passed to closers who handle signing of contract and doing everything necessary with the merchant until funding complete.
-An admin will also be necessary and some will have underwriters that review bank statements and credit reports so that the file goes to the best funder for that type of file. -Would also have a management team to lead the different teams to meeting their goals.
-Finally there would be a renewals team that is proactive on renewing clients as this is the biggest profit maker and an accounting team to handle all financial responsibilities.
We mentioned Syndication so lets briefly touch on it. Syndication is the process where an ISO is able to put skin in the game, so to speak, by contributing their own capital into merchant cash advance deals with the funder. For example, if an ISO submits a deal to a funding company and its approved for an MCA, that ISO can participate in the deal by offering to put their own capital up to typically 30-50% of the approved advance amount. The ISO would then get an equal percentage return on that minus any platform servicing fees from the funding company.
So as you can see, ISOs are a key stakeholder in the alternative finance ecosystem that help forge working relationships between business owners and direct funders to create win-win outcomes for all involved. There are ISOs opening up all the time and some shutting down. Owning and operating an ISO or working as a broker can be very lucrative but one should research it much further before getting into it. However there's no denying the vital role they play in establishing trust, facilitating communication, and being an ambassador at large for our industry is not easy nor easily replaceable.