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December 1, 2009updated 12 Apr 2017 4:29pm

Could a broker-lessor JV model work?

By treating each deal as a single transaction to be placed with the most profitable source, a broker is being true to his definition, but is not necessarily creating a platform for longevity.

By Richard Hoggart

By treating each deal as a single transaction to be placed with the most profitable source, a broker is being true to his definition, but is not necessarily creating a platform for longevity.

Nor by encouraging this practice, with the structure of commission packages, is the funder. Long term, the relationship often breaks down when bad debts begin to grow, debit-backs kick in and both parties often just move on to a new partner.

So how can we change this cycle? The joint venture model is the answer. The broker takes on the duties of the sales division, and the funder takes on the duties of looking after risk, underwriting and collections. Both profits and losses are shared on the book as it grows and matures.

This model has worked well in recent years with a small number of brokers and funders, and I for one am surprised it has not been replicated by others.

In order to succeed, both parties have to realise that the understanding of security in the relationship is critical to portfolio growth. Additionally, the broker needs to shift mindset from short-term gain to one of long-term increased profitability, being prepared to take a share of risk for the more likely greater reward.

This movement to future revenues can impact a broker’s cash flow; an understanding of this, and therefore support from the funder, is crucial. The funder has the benefit of a partner who is much more focused on quality and efficiency, but must commit to sharing much more information on pricing, underwriting, collections and arrears than historically would have been the case under the traditional transactional relationship.

As we exit recession and credit crunch and move into more positive times, with hopefully new funding looking to enter the market, what better time to make this transition?

Richard Hoggart is head of DSG Financial Services

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