Who pays the broker's points on a funding deal?

The two mechanisms

Both are paid by you. Only one is on the term sheet.

Worked

Illustrative only — an $80,000 advance.

At a buy rate of 1.28, the total repayment is $102,400. Offered to you at 1.35, the total is $108,000. The $5,600 spread is 7% of the advance, and it is not described as a fee anywhere.

Now add three points deducted at funding: $2,400, so $77,600 reaches your account. Against that cash, the effective factor is 108,000 / 77,600 = 1.3918.

On a schedule of 128 daily debits — $843.75 a day at the sell rate — the annualised cost on the $77,600 you received is 137.4%. The same deal at the buy rate with no points, $800 a day on the full $80,000, annualises to 100.9%.

The intermediation cost 36.5 percentage points of annualised cost and $8,000 in cash: $5,600 of spread plus $2,400 of points.

How to spot a spread without being told about one

You will rarely be shown a buy rate. Four signals that one is being marked up.

The renewal, where the commission is charged twice

Illustrative only — you took $80,000 at a 1.35 factor, so $108,000 to deliver, and you are 60% of the way through. You have delivered $64,800 and $43,200 remains.

A renewal is offered: $120,000 at the same 1.35, so $162,000 in total. Of the new funding, $43,200 retires your existing balance, so the net new cash reaching your account is $76,800 before any fee at all.

The cost of the new deal is $42,000. Measured against $76,800 of genuinely new money, that is 54.7%, not the 35% the factor implies.

Across both deals you have paid $28,000 plus $42,000 — $70,000 — on $156,800 of cash that actually reached you. 44.6% per dollar received.

And the commission is calculated on the $120,000, not on the $76,800 of new money. At four points that is $4,800 rather than $3,072. The renewal is the most profitable transaction in this market for everybody except the business, which is the reason it tends to be offered before you have asked for it.

This is not an argument against brokers

A broker who knows which funders will approve your file, who assembles the package once, and who gets you a decision in two days rather than three weeks is providing something. Some negotiate a better price than you would get direct, and net of their commission you are ahead.

The problem is not the commission. It is a commission you cannot see, on a deal you were told was the only one available.

What to ask for, in writing

1. Are you a broker or the funder? Get it in writing — the entity on the contract is the funder.
2. What is your commission, in dollars, and how is it paid?
3. Is any part of it a spread over the funder's buy rate?
4. Which funders did you submit to, and what did each come back with?
5. Are you being paid anything by the funder beyond the commission on this deal?

Question four matters most. A broker who submitted your file to six funders and shows you the responses has earned the fee. One who returns with a single offer and will not say where it came from has not demonstrated anything.

Two more things worth knowing

Submitting one application to multiple funders is normal and is how the market works. Having your file shopped to twenty without your knowledge is not the same thing, and it is worth an explicit instruction about who may see it.

And note that a broker's fee is usually earned at funding. Once the money moves, the fee is paid whether the deal was the best available or merely the first. Price the offer before you accept it, not after — the calculators take the fee and the factor as separate inputs.

What to refuse