Why Your Broker's Commission Matters More Than You Think

When you use a commercial finance broker to arrange funding for your business, you are paying for their expertise and their market access. That is reasonable. A good broker earns their fee by finding the right lender, structuring the deal properly, and managing a process that would otherwise cost you significant time and effort.

What most business owners do not know is how that fee is calculated, and how much that calculation can affect the cost of the finance they end up with.

This guide explains how broker commission works in the SME lending market, where the problems are, and what to ask before you commit to anything.

In most commercial finance transactions, the broker is paid by the lender rather than by you directly. The lender pays a commission when the deal completes. That commission is built into the cost of the product, which means you are paying for it through the interest rate or fees on your facility, whether or not it is disclosed to you.

This arrangement is not inherently wrong. It is how most intermediary markets work. 

The problem arises when the commission structure creates an incentive for the broker to recommend a product or lender that pays them more, rather than one that suits your business better.

Some lenders in the SME market allow brokers to set their own commission rate within a range. That commission is directly tied to the interest rate the client pays. The higher the commission the broker chooses, the higher the rate you pay.

This is called a discretionary commission arrangement. It has already been banned in the motor finance market by the Financial Conduct Authority, following a review that found it was causing widespread harm to consumers. The FCA concluded that the model created a direct conflict of interest between the broker's financial interest and the client's best outcome.

The same model continues to operate in parts of the SME lending market.

What this means in practice is straightforward. A broker working under a discretionary commission arrangement can increase their own income by choosing a higher commission rate. 

You pay more. They earn more. And you are unlikely to know this has happened, because the disclosure requirements in the SME lending market are weaker than those in consumer finance.

A business paying significantly more than it should for its finance, month after month, because a broker chose to maximise their commission at the point of sale, is not an unusual situation. It is one I help businesses recover from regularly.

A separate issue is commission structures that reward brokers for placing a certain number of deals in a given period. The more deals placed, the higher the commission rate on each one.

This creates an incentive to place deals quickly rather than carefully. Speed is rewarded. 

Suitability is not.

The broker who places your deal in the final week of the month, when they are close to a volume threshold that unlocks a higher commission rate, has a financial incentive that has nothing to do with whether the product is right for your business.

Before you engage a broker or accept a funding offer arranged through one, ask these questions directly.

Is the commission discretionary? That is, did the broker choose the level, or is it fixed by the lender?

What is the commission amount, and how was it calculated?

Would a lower commission rate have resulted in a lower interest rate or lower fees for my business?

Are there lenders on your panel who pay lower commissions, and if so, why are you recommending this one?

A broker who is operating with your interest genuinely at the centre of what they do will answer these questions clearly and without discomfort. A broker who is not will tell you a great deal by how they respond.

At Goodman Corporate Finance, all commissions are disclosed before you sign anything. Our commissions are not discretionary. We find the right finance for your situation and our income follows from that. We are not incentivised to place you with whoever pays us most.

That is not a marketing claim. It is how the firm was built and how it operates. 

If you want to understand what that looks like in practice, I am happy to explain it before we do anything else.