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The following article appeared in the
American Cash Flow Journal – July 2003
Something Small-Something Different!
They say good things come in small packages.
That may be true for some things but not usually when it comes to
a commission check. When a consultant has worked hard to promote
and package a transaction and then diligently sourced the right
funder for the job they have every right to expect a meaningful
commission.
But what if the commission check is only $30.00?
Is it worth the effort?
We think that the answer depends on a number of
components inherent in the transaction. The first is, obviously,
just how much work was involved in locating the client? Secondly,
how difficult was it to find a prime funding source? If the answer
to these two questions is “not too difficult”, then
a third aspect comes into play - is there any repeat business?
We raise these issues because we see a growing
market in discounting real estate agents’ commissions. Yes - you
can discount a commission that has not yet been earned.
In a conventional factoring or invoice discounting
scenario the funder always insists that the ‘goods are sold
and delivered’ or ‘the services have been rendered’
before the transaction can move forward. They are so insistent on
this aspect that they go to great lengths to verify that the transaction
is fulfilled in every single detail.
Invoice Discounters have now perfected a methodology
to discount real estate sales commissions in a secure and timely
manner. Often the paperwork is much less than in a more conventional
factoring or discounting transaction.
In a typical real estate transaction an agent that
was responsible for putting the buyer and seller together earns
a commission for their efforts. That commission, however, is due
and payable at the actual time that the real estate transaction
closes and the buyer completes the purchase. Quite often from the
point in time when the agent says everything is set, all conditions
have been met, and contracts have been exchanged between the buyer
and seller, a time lapse of 30, 60 or even 90 days might be quite
common until such time as the transaction closes. It is that ‘closing’
that triggers the payment of the commission to the sales agent.
Through a commission discounting arrangement, it
is that time period that can be substantially reduced for the agent.
Real estate agents invariably have an overhead cost structure that
needs to be taken care of on a day-to-day basis. If their income
is tied up waiting for legal closings of their transactions, their
personal cash flow can be seriously curtailed. Through the medium
of discounting, a more even cash flow can be achieved.
Can a consultant help with such transactions? That’s
where the smaller than average commissions come into play. We stated
that the effort-reward equation focused on how much time and effort
went into finding the client. In this instance the client is a real
estate agent. This is not a ‘broker’ but an agent that
is employed by the broker. In any reasonably-sized real estate office
you might find anywhere from 5 agents to 105 agents, all with the
same cash flow concerns.
Because you have ‘groups’ of agents
in one central location, marketing to them is made quite simple.
Why talk to just one person about this service when you can cover
maybe 50+ at one time. Naturally this ‘blanket’ effect
gives you a greater chance to secure a client or maybe several clients
from the one, single real estate office. Therefore, client acquisition
might be somewhat easier than pursuing more conventional methods
that might be used in factoring type transactions.
Having found that clients may be readily available,
part two of the equation questioned how easy it would be to find
a prime funding source. Again that aspect is no more than a single
‘phone call’ away. So we have now established that we
can readily acquire a client, or more likely several clients, and
a funding source.
But our commission check is still only going to
be in the area of perhaps $30.00. Is the set-up, time and cost effective?
It’s time to look at the broader aspects of the transaction.
In talking about real estate agents and their sales, we are always
referring to the sale of single family dwelling houses. This discussion
does not apply to investment properties or to commercial real estate
transactions.
In the area of single family dwelling house sales,
the transaction numbers are substantial. You only have to look in
your local newspaper to see listing after listing of ‘houses
for sale’. The market, therefore, is very substantial and
virtually all sales involve a real estate agent.
Now you can do the math the same way that we can—If
you have 5 clients that are real estate agents and they are making
a sale each month, then your commission check could easily be in
the region of $150.00+ per month or $3,000 each year. How much effort
did you put into setting up the relationship-probably not too much.
How much effort do you put into the repeat business-probably zero,
but the checks keep coming.
One of the great advantages of comparatively small
transactions is the loss factor. If one of your clients ceases to
be a client then your income stream is not greatly impaired, whereas
if you only have two clients providing you with substantial income
and one drops out, you lose 50% of your revenue. Sometimes it pays
to spread your commission base as far as you can. Real estate agents’
commissions might be the answer to that requirement.
They may be small, but the numbers multiply, and
the demand is there.
David T. Banfield
President of The Interface Financial Group
Providing working capital for small business.
1-800-387-0860
ifg@interfacefinancial.com
www.interfacefinancial.com
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