Real estate finance expert James Steer reveals how agencies can use advance commissions to improve their cash flow, and explains why this strategy doesn’t deserve its bad reputation.
Advance commission has been around for about 30 years but has suffered a bit of a bad reputation. In the past it has been seen to be a last-minute bailout tool that companies only used when they were facing collapse. It was thought that if you needed an advance on cash, your business must be in financial trouble.
This kind of reputation couldn’t be further from the truth. Advance commission is not a loan. It’s used regularly by savvy business owners who want more freedom in their business to grow, and is a globally accepted way of boosting your business.
What are the benefits?
Advance commission arrangements are designed for real estate agencies that want to avoid the long wait for commission payments and improve their cash flow situation.
Bringing forward your commission payments means your focus remains on your next sale, rather than worrying about your finances. Advance commission gives you the freedom to take the next step in your business, whether that’s hiring new staff, refurbishing your office or updating your website.
What are the drawbacks?
There are some drawbacks to using advance commission. Most advance commission companies won’t advance your funds when your sale is off-the-plan or a future development, due to a sale contract being conditional to an advance.
Also, the rates may be different to those offered by traditional long-term lending institutions, and can vary. However, they are comparable given they are a short-term arrangement only and don’t require any security.
What processes are involved?
The process of obtaining an advance commission is easy and straightforward. Once your team closes a sale, simply contact a reputable advance commission agency and submit an application. After an initial membership application process, you will normally receive your advance within a few hours of your application being approved.
Advance commission is not a loan, therefore it’s not a balance sheet liability. You can receive up to 100 per cent of your unsettled commission amount and you don’t have to worry about repayments until you’ve received your commission from the sale.
What are the misconceptions?
Unfortunately, there are quite a few misconceptions about advance commission, simply because reputation often precedes the facts. Most lending concepts that break tradition usually come with a certain level of scepticism. People often think that if something is new it must be risky and have some sort of catch involved.
The biggest misconception is that advance commission is too expensive. Generally, this isn’t the case, however, advance commission agencies do have differing rates so it pays to shop around.
Another common misconception is that advance commission should only be used as a last resort. It was often seen that if you needed an advance commission, your company must be facing financial stress and this was a bailout solution. This is certainly not the case, with plenty of profitable and financially healthy companies using advance commission. It is used by leading franchise groups, boutique agencies and independent companies alike.
It’s also often thought that a bank overdraft is a more reliable source of funding. Applying for an overdraft is often a long, tiresome and rigid process, and often requires you to have some property as security. Once you’re approved, it can still take weeks for you to receive your cash injection. An advance commission in comparison is a fast and easy process that lets you access your cash the same day.
What are the costs involved?
Firstly, it’s a good idea to only deal with an advance company that charges one fixed rate and doesn’t charge hidden extras like administration or transactional fees for each and every advance.
Secondly, look for an advance company that will advance 100 per cent of your sales commissions. Many will only advance 80-90 per cent.
The advance fee differs with different agencies, and will depend on the length of the property settlement. Fees are commonly charged as a percentage of your commission or at a daily rate per $1,000 lent.
When is an advance payment made?
Payments are made very quickly, with most advances being made within four hours. All your agency needs to do to qualify for a commission advance is have a sale complete with an unconditional contract, and a deposit paid.
When does an advance need to be repaid?
The advance is repaid at settlement. This is similar to how you would account to yourself at settlement for the commission you are owed.
It’s also a good idea to use an advance company that will allow you to repay your advance early and receive a credit on fees (since some fees are calculated on a daily rate). This means a fast settlement reduces the amount of fees you’re liable to pay.
What happens if the sale falls through?
In the unlikely event that a sale falls through before settlement, you have two options:
- You can repay the early advance, including any accumulated fees.
- You can keep the advance and assign it to another transaction. If you choose this option, the replacement commission will need to be of an equal or greater amount.
If you choose to work with an advance company that has a background in real estate, they will have been in your situation before and will be able to work with you to find a solution that suits everyone.
Advance commission is losing its bad reputation now as more and more real estate businesses realise that this is a more affordable way of sustaining and growing their business. The use of advance commission is rapidly growing because of the great benefits and the simple application process involved.
If you think your real estate business could benefit from improved cash flow, why not consider advance commission as a workable solution?
James Steer is a real estate finance expert with nearly 25 years’ experience running businesses involved in the sale, management and development of residential property. As chief executive of Commission Flow, James applies his understanding of real estate operations to helping agents manage their cash flow and create the financial freedom to grow.