What a commercial finance broker does (and how they're paid)

There are hundreds of business lenders in the UK: high street banks, challenger banks, specialist lenders, asset finance companies, invoice finance providers and more. Each has its own appetite: the sectors it likes, the minimum trading history it wants, whether it needs security, how fast it moves. Most business owners don't have the time to learn all of that, and applying to the wrong lenders one after another wastes weeks and can leave marks on your credit file.

That's the gap a commercial finance broker fills. This guide explains what a broker does, how they're paid, how they're regulated and how to choose one.

Lending Lenny introduces business owners to brokers, so we aren't a neutral observer here. That's all the more reason to set out plainly what you should ask any broker, including one we introduce you to.

What a broker actually does

A commercial finance broker is an intermediary. They don't lend money. Their job is to get you the right funding from someone who does. In practice, that usually means four things.

• Understanding what you need. A good broker starts with questions, not products: what the money is for, how much and for how long, what you can afford to repay, and what security you can or can't offer. Sometimes the answer is a different product from the one you asked about.
• Knowing lender criteria. This is the core of the job. An experienced broker knows which lenders will consider a two-year-old business, which like your sector, which will lend against invoices or equipment, and which won't touch a county court judgment (CCJ). Some lenders only accept applications through brokers.
• Packaging the application. The broker gathers your accounts, bank statements and other documents, writes up the case and presents it in the way each lender needs. A clear, complete application is easier to approve and quicker to process. Our guide to the documents you need for a business loan covers what's usually involved.
• Negotiating. Where more than one lender is interested, the broker can compare the offers and push on price, fees, term and security. They should also explain the terms of the offer you choose before you sign.

A broker doesn't make the decision, and nor do they guarantee one. The lender decides whether to lend and on what terms, and you decide whether to accept.

How brokers are paid

Brokers are paid in one or both of two ways, and you should know which before you start.

• Commission from the lender. Many lenders pay the broker a commission when a deal completes, often a percentage of the amount borrowed. You don't pay it directly, but it's part of the lender's costs, so it can be reflected in your price. With some lenders, the commission is linked to the rate you pay: a higher rate can mean more commission for the broker.
• A fee from you. Some brokers charge a fee, usually a percentage of the funding or a fixed amount. It's normally payable when the funding completes, and should be agreed in writing before any work starts.

Some brokers are paid by commission only, some by fee only, and some take both. None of these is wrong in itself. A broker on a complex case may earn every pound of a fee by finding funding you wouldn't have found yourself. What matters is that you know the full picture, so you can judge whether the deal is good value.

An illustration. Say you need £80,000 to buy a business. A broker charges a fee of 1.5% on completion, which is £1,200, and receives commission from the lender. If the broker finds an offer that costs you £2,500 less in interest than the best you could have arranged yourself, or finds a lender at all after your bank said no, the fee looks reasonable. If you could have got the same deal from your own bank, it doesn't. This is an illustration, not a typical fee.

Include any broker fee in the total cost when you compare offers. Our guide to what a business loan really costs shows how.

How brokers are regulated

This is where many business owners are surprised, because the rules depend on who is borrowing and how much.

• Regulated lending. Lending of £25,000 or less to sole traders and small partnerships is regulated by the Financial Conduct Authority (FCA). A broker arranging that kind of credit must be authorised by the FCA for credit broking. FCA rules require them to be clear about the fees they charge, and in many cases about the commission they receive and whether they work with the whole market or a limited panel of lenders. If something goes wrong with a regulated deal and the broker doesn't put it right, you can take your complaint to the Financial Ombudsman Service.
• Unregulated lending. Most lending to limited companies and LLPs, and larger loans to sole traders for business purposes, is generally unregulated. A broker can arrange it without FCA authorisation.

Many commercial brokers hold FCA authorisation anyway, because they also arrange some regulated deals. That's a good sign, but it doesn't mean every deal they arrange is covered by FCA rules. For an unregulated loan, your protection comes mostly from the contract you sign and the general law, which is one reason to read terms carefully.

You can check whether a broker is authorised on the FCA's public register, which also lists its permissions and any trading names. Make sure the details, especially the phone number and website, match the firm you're dealing with, because fraudsters sometimes copy the names of genuine firms.

There are also trade bodies for commercial finance brokers, with membership criteria and codes of conduct. Membership isn't a guarantee of quality, but it does mean the broker has signed up to a set of standards, and there's usually somewhere else to take a complaint.

When a broker helps most

For a simple loan from your own bank, where you have a good relationship and strong accounts, you may not need a broker at all. Brokers tend to add the most value when:

• Your case is complex. An acquisition, a property purchase, a mix of products or several layers of funding needs someone who knows how the pieces fit.
• You've been declined before. A broker can work out why, and which lenders are more likely to say yes. See our guide on what to do if your business loan is declined.
• You need a specialist product. Invoice finance, asset finance, bridging and development finance are often arranged through brokers, and some specialist lenders don't deal directly with businesses.
• Your credit history isn't clean. Knowing which lenders will look past an old default can save you a string of rejections.
• You're short on time. Packaging an application properly takes hours, and comparing lenders takes longer.

Questions to ask a broker

A good broker will answer all of these plainly, ideally in writing. Hesitation is itself an answer.

1. How are you paid on this deal? Commission, a fee or both? How much, and when is any fee due?
2. Is any of your fee payable if I don't get an offer, or if I turn the offer down?
3. How many lenders do you work with? Are you whole of market, or do you work with a panel?
4. Are you FCA-authorised, and is this deal regulated?
5. Will you check with me before any hard credit search is run? A hard search shows on your credit file, and several in a short time can put lenders off. Our guide to business credit scores explains why.
6. What security or personal guarantee will lenders want?
7. Why this lender and this product, rather than the alternatives?

Red flags

Plenty of brokers do an honest, skilled job. These are the warning signs that you may be dealing with one who doesn't, or with someone who isn't a broker at all.

• A fee upfront, before you have an offer. Asking for money before any lender has agreed to lend is the classic pattern of advance fee fraud. Genuine broker fees are usually payable on completion. A few brokers ask for part of their fee at the start on complex cases, and on secured loans you may pay for a valuation before an offer. Either way, get in writing exactly what the money is for, who receives it and whether it's refundable.
• Guaranteed approval. No broker can promise a lender's decision, and a guarantee of approval is a common hook in scams.
• Pressure to sign today. Real offers come with time to read them.
• Vague answers about payment. If they won't tell you how they're paid, assume it's not in your favour.
• Being asked to stretch the truth. A broker who suggests overstating turnover or leaving out a debt is asking you to mislead a lender, which can amount to fraud, and the consequences can fall on you.
• Payment to a personal account, or details that don't match the firm's register entry.

Common mistakes to avoid

• Not asking how the broker is paid. It's a normal question, and the answer belongs in your cost comparison.
• Using several brokers at once. If they all approach the same lenders, you can end up with duplicate applications and several hard searches.
• Signing a fee agreement without reading it. Check when the fee is due and in what circumstances.
• Leaving out awkward facts. Lenders will usually find missed payments and CCJs anyway. Telling your broker early means they can pick lenders who'll accept them.
• Assuming the first offer is the only one. Ask whether there were others, and why this one was chosen.

Questions people ask

Do I have to pay a commercial finance broker?

Not always. Many brokers are paid only by commission from the lender, so you pay no fee directly. Others charge a fee, usually on completion. Ask before you start and get any fee agreed in writing.

Are business finance brokers regulated by the FCA?

Brokers arranging regulated credit, such as loans of £25,000 or less to sole traders and small partnerships, must be FCA-authorised. Most lending to limited companies is unregulated, so a broker can arrange it without FCA authorisation, although many brokers hold it anyway. You can check a firm on the FCA register.

Will a broker get me a better rate than my bank?

Sometimes. A broker can compare offers from many lenders and negotiate, and may find options your bank doesn't offer. But if you have a strong relationship with your own bank, it may give you a competitive price directly, so it's worth comparing.

Does using a broker affect my credit score?

Not by itself. Many brokers and lenders use a soft search first, which doesn't affect your score. A full application usually involves a hard search, so ask before any application is made.

Is it a red flag if a broker asks for a fee upfront?

It should make you cautious. Genuine broker fees are usually payable when the funding completes, not before any lender has agreed to lend. Asking for money upfront with no offer in place is a common pattern in advance fee fraud.