WLN Columns

Point/CounterPoint: Is the Broker Model “Dead?”

Point/Counterpoint is a new feature sure to capture the adventurous spirit of the equipment finance industry. We’ll look at issues facing our industry in today’s uncertain and challenging business environment. And we’ll ask two industry experts to provide opposing, but equally valid views. Our first topic is near and dear to the hearts of many WLN readers–the future of the broker world in the high tech world! Take a look at what two industry experts have to say: Chris Enbom from Allegiant Partners and Spencer Richman from American Financial Network.

Is The Broker Model “Dead?”

“No!” - Relearning and Adapting to Survive and Thrive in Today’s Market

By: Spencer Richman, American Financial Network

Many people think that the great Credit Crunch of the last few years spells the end of the equipment leasing broker model. They will cite the number of leasing brokers who have gone out of business, the number of funding sources who have stopped doing business with brokers, and the number of funding sources who have themselves gone out of business. The undeniable fact remains, however, that many equipment leasing brokers still continue to operate, serving their customers and vendors and writing transactions.

I believe that the broker model is not dead at all. In fact, I believe that this is a great time for equipment leasing brokers to invest in their businesses and attempt to grow and grab market share! I do not deny that there have been significant changes in the industry, but those changes, if anything, have merely caused the surviving brokers to go back to our roots. The broker of tomorrow certainly will not look like the broker of yesterday. Gone are the days of easy app-only approvals to $150K which can be doc’ed and funded in the broker’s name. If we go back a little farther into the 1980’s and 90’s, we’ll remember that brokers had to obtain a lot more information on every transaction, and frequently had to write leases on the funding source’s paper. We relied a lot more on our own personally developed relationships with local banks and lenders because there simply were not a lot of national funding sources marketing to leasing brokers.

The equipment leasing market today is forcing brokers to relearn how to be creative, to relearn the importance of developing local relationships, to relearn how to dig deeper to gain a truer understanding of clients’ needs, and to relearn how to bring value to a transaction. Does this description sound familiar? To me it sounds a lot like how our industry was in decades past.

In today’s market the broker model which can survive and even thrive is the one in which the broker actually takes the time to bring real value to both the prospect and the lender. Just as lenders have pulled back from the leasing broker’s world, they have also pulled back from lending in general to our clients and prospects. This leaves a void which the broker can fill by fulfilling the essential functions of communicating and educating both parties. The prospects need to be told, in terms that they can understand, why they no longer qualify for the type of lending that they have in the past. The lenders need to be educated about why your particular prospect’s request makes sense. The broker needs to pay more attention than ever to showing the lender the purpose and justification for the request, as well as the secondary sources of repayment, and even potential exit strategies for the loan/lease. The broker must be able to provide more knowledge and information and present more clearly than the lender would be able to do themselves.

The broker model is changing, just as our industry is changing. It is forcing those brokers who want to succeed to adapt to new ways of doing business and new ways of thinking. But, for those brokers committed to staying and learning, the broker model of equipment leasing will continue to be a fun, interesting, and rewarding profession.

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“Yes!” - Technology Claims the Old Broker Model

By: Chris Enbom, Allegiant Partners

Allegiant Partners is a small (less than 20 employees), but sophisticated funding source – we service our own portfolio and keep a healthy balance sheet. Over the past three years we have progressively transformed our business and evolved into what we believe is the new convergence model: a funding source combined with a skilled broker / discounter. This new model enhances our overall effectiveness by providing marketing synergies and the benefit of multiple small ticket origination channels. The most intelligent brokers are aligning themselves with capital and technology (Allegiant offers both).

Since our inception in 1998, Allegiant has always been an indirect funding source originating transactions through the broker community. Our core competencies were in underwriting and credit adjudication, not in sales & marketing. In mid-2008, to expand our existing origination capacity, Allegiant acquired a well-managed broker operation that had been submitting and closing “good-fit” transactions to us for several years. Thus began our entry into direct sales as a supplement to our broker origination channel. The results have been remarkable.

Protecting the integrity of our original broker model is very important to us so we built an effective firewall between our internal broker unit and the independent brokers we serve. Our internal originators have had no insight into what the independent brokers are doing or the transactions that they submit. Our internal sales unit retains a separate office (40 miles away) and runs a different front end system and a distinct data base. This has avoided channel conflict.

Since 2008 our originations from our special broker programs and our direct broker unit are up 150%. Our originations from general independent brokers have not risen, and the number of general independent brokers is down significantly.

If Allegiant, through a well-designed program, is able to handle the bulk of the administrative and underwriting tasks, the broker or direct sales group is free to pursue its marketing and sales goals with greater resources. By uniting front and back end performance metrics with our sales unit’s marketing data we’re able to identify specific market niches that are not served by the other brokers we work with at Allegiant. The quality and speed of our research into such niches has improved by combining both our credit and marketing expertise at a granular level. This allows us to develop highly effective and flexible programs that target specific credit profiles shown to have consistently performed well over time. Under these programs we can approve transactions with greater speed and with less information than previously required. Our high level of confidence in these programs enables our niche brokers and/or direct sales group to pursue them assertively and compete effectively.

Another challenge many small brokers now face is the dearth of funding sources for “A” credits. These “A” sources tend to be banks, which have responded to the structural and regulatory change in their industry by tightening credit criteria and relentlessly pursuing efficiency. With low interest rates, a stagnant economy, tight credit markets and regulatory pressure expected to continue, it looks unlikely that many new “A” funding sources will soon enter the market to serve small independent brokers. Thus a lasting alliance with a “B” funding source like Allegiant becomes even more important, and we can access “A” sources since we have a balance sheet (often a pre-requisite now for a relationship) and higher volumes.

Allegiant continues to make the majority of its revenue through its valuable relationships with small independent brokers. Our most beneficial relationships, however, are with sophisticated brokers who have deep knowledge of a niche market and who know their customers. We can work closely with these brokers to develop successful programs that allow Allegiant to respond faster, buy deeper and with more confidence. We have a strong interest in fostering the health of these brokers – they are our best customers – and we believe that many of them would grow and thrive if they partner on specific programs with a strong funding source (i.e. if they evolve into the new convergence model as well).

What is the “new” broker model? The new broker is extremely technologically savvy, has at least a limited balance sheet, and is embedded with its funding sources. In many ways, you are looking at it.