How to Build a Residual Income in the Finance Industry
Commercial Financing Solutions That Bring In Additional Income
Residual income is a source of passive income that generates without continuous active work. So many brokers that are experienced in one or two forms of commercial financing fail to incorporate financial instruments in their business model that they can earn residual income off of. Meaning completing one deal and getting paid month after month long after the deal has been closed. Residual income is a very obtainable reality for loan brokers, and Account Receivable financing or factoring is a very effective way to make it happen.
Here’s How It Works
Nearly every business today receives their income as they receive payment from their customer base. The majority of times a business either gets paid on a 30, 60, 90 or more day cycle from their customers on work or a service performed by the business. However, the costs of business (such as payroll, employee benefits, office costs and vendor invoices) often exceed the rate at which customer payments are received. A vast amount of businesses can’t wait to receive payment in 60 days or more. Business owners need to have ways to quickly gather income to pay off debts and expenses, and often they turn to lenders to help with this situation. And that’s where our graduates come in.
If you decide to explore earning a residual income through AR financing or factoring, keep these general guidelines in mind of how the process works.
Remember, the credit emphasis is generally not on your client, but rather your client’s customer’s credit. First, when you identify a client that would be a good candidate for AR financing/factoring you will have to obtain their accounts receivable aging report, which is a document that states what payments are due and from whom, and when the invoices are typically paid. Every business should have this readily to provide. This helps the lender assess the quality of the invoices and helps establish general terms/rates to the client. Generally speaking, the more current the invoice, the more it is worth. If an invoice is over 90 days due, lenders hesitate to finance it. When the lender buys any given invoice they will usually advance up to 80% of invoice value to your client. So if it is a $100,000 invoice the lender can advance $80,000 immediately to your client with out your client having to wait 30, 60, or 90 days. Now the lender assumes the invoice and has to wait to get paid from your client’s customer. Let’s say this invoice generally gets paid in 60 days. After the lender gets paid after the 60 day time period, the lender then sends the remaining 20% (or in the case $20,000) back to your client minus the lender’s discount fees. Typically the average time a client stays with an AR financing/factoring lender is approximately 30 months. That is good news for you, the broker, as you will continue to get paid monthly for 30 months on the volume that your client does with that lender.
As a loan broker, you can make residual income through facilitating accounts receivable financing/factoring. The broker typically receives a 10-15 percent commissions on the ongoing monthly fees the lender makes. This payment is received monthly and is based on the previous month’s invoice activity. Because the deal is only facilitated once, each additional monthly payment you receive is residual income. A reasonable range for monthly commission can be anywhere from $100 to $1,500 a month depending on volume a client is doing with the lender. That might not seem like much, but when you factor the minimal energy it takes to proctor the arrangement, and the possibility of brokering several accounts receivable deals at once, the residual income possibilities are virtually endless.
Accounts receivable financing/factoring is becoming more appealing to businesses, especially because of tough economic and business circumstances. Consider expanding your loan brokering practice to include accounts receivable financing/factoring as part of your repertoire.