CHOOSE YOUR PARTNERSHIPS WISELY: Considerations in the T.P.O. & Funding Source Alliance
BY THERESA KABOT
Whether you are a third-party originator or a funding source/bank, the responsibility lies with all parties to build partnerships based on mutual trust, mutual commitment, shared ideas and common goals.
For the last twenty years, I have owned a third-party origination company/brokerage in Seattle. Throughout the years we have received hundreds of emails and letters from customers telling us how their business wouldn’t be where it is today if it wasn’t for the financing we procured for them. It is such a great feeling, and we owe much of it to the funding sources, banks and colleagues with whom we have partnered along the way.
The choices we make when selecting business partners are critical to growth and success. This includes alliances between third-party originators (TPO), brokers with a funding source and banks.
When beginning the process of finding the best funding partnerships, we first need to look at the state of the industry. For a while now, we have seen an increase in the number of new funding sources and banks entering the equipment financing sector combined with historically low rates. This increased availability of funding has given TPOs more choices than ever for both financing products and financing sources.
As for the expansion of the TPO sector, it has been difficult to gauge the number of TPOs and brokers in large part due to the inability to properly classify a commercial equipment finance broker via industry code. If you were to conduct a SIC search of TPOs, you might be surprised to see that most who are members of the “big three” industry associations do not appear. The TPOs as a group still have the ability to remain off the proverbial radar in industry classification, so it is more challenging to define their growth.
This set of circumstances is valuable for smaller TPOs, who can now rely more on the availability of funding as well as the technological-related efficiencies their sources provide. These efficiencies can be found in online portals for the submission and documentation process and sales and marketing support for vendor programs or pricing programs, which in the past only larger companies have had the resources to provide.
The TPO who is in business for the long term also relies heavily on their funding source for backend support regarding matters that involve credit references, early payoffs, payment due date changes or collections. These elements can be a deciding factor in whether to continue working with an existing customer.
The backend aspect also benefits both TPO and funding source. Not only does the funding source rely on the TPO to develop business that fits its footprint and to -vet the transactions with due diligence, but TPOs may also need help with payment performance issues down the road. Since the TPO is the first point of contact, they can develop more personal relationships. A TPO with a long-term outlook will be ready and willing to jump right in with their funding sources on collection matters as needed.
Before a TPO begins the process of selecting a funding source, their company needs must be assessed. This is best done with a business plan that identifies where the company is today and where it wants to be in five years. Take the time to consider factors like the economic outlook of niche markets, the continuation of brokering, a possible transition to discounting or even starting an internal portfolio.
Once an outline has been created, the next step is to find out with whom they want to do business. There are many factors to consider when deciding whether or not to pursue a funding relationship, including the sources of funding, pricing, product, operations and, most importantly, reputation.
Additionally, a TPO should find out who owns the funding source and how they secure their funding. As we look down the road to the next recession, a TPO needs to know if they will be able to sustain their funding model and liquidity. Another good question to ask: how long have they been working with the TPO channel? Do they have a direct sales force? How do they determine their pricing and is there anything that a TPO can do to affect said pricing?
The basic “get to know you” questions about daily operations are also important. Do they use a credit scoring method or is there a credit analyst perspective involved? Can automated system declines be resubmitted for a second look? Do they accept sub-brokered transactions? Will they offer prefunding or allow you to pay vendors and be reimbursed by the funding source?
Find out how the customer service department is organized. Is it even in the same building or handled by another division? There is a growing trend to outsource servicing and collections and many of our sources use the same servicing company because they do such a great job.
Finding like-minded funding partners is paramount to a TPO’s continued success so it’s reasonable to ask for specifics, such as:
• If a customer we booked with your company calls you direct for financing how you will you handle the lead?
• If a customer calls you for additional financing needs and you have two contracts with two different TPOs, to whom will you send the referral?
• Can we expect to receive support on booked transactions such as early payoffs or credit references on accounts we placed in partnership with your company?
A TPO who is in business for the one-off transaction and the easy money philosophy may not care about the answers to these questions, but funding sources should proceed cautiously with such a TPO.
Finally, ask the most important question: how will my company benefit from a relationship with your company? Before I started my own brokerage and funding division, I worked as a sales rep at a funding source and found that most of the bad feelings between a TPO and funding source occurred when we did not understand each other’s appetite.
If you are a TPO, concentrate on finding a funding source partner who has common goals and who won’t direct market to your client base. If you are a funding source or bank, focus on providing the best products and services to your TPO channel to grow your footprint. The responsibility lies with all parties to build partnerships based on mutual trust, mutual commitment, shared ideas and common goals. •