Using a commercial finance broker: what they cost and who actually pays them

You need £120,000 for equipment and working capital. Your own bank has taken six weeks to say no, or has offered half of it against a charge over everything you own. Somebody suggests a broker. Within four days you have three offers on the table and a sense of enormous relief.

That relief is the moment to slow down, because a commercial finance broker is not a neutral search engine. They are paid, usually by the lender, usually as a percentage of what you borrow, and the amount varies between lenders on their panel. That is not a scandal in itself — it is how the market has worked for decades, and most brokers are straight about it. But it does mean the incentive facing the person recommending your loan is not identical to your interest in getting the cheapest one, and in the commercial market there is far less obliging them to spell that out than most owners assume.

What a broker actually does for the money

The honest version of the value is this. A decent commercial broker knows which of forty-odd lenders will look at a business with your profile — your sector, your filed accounts, your time trading, your credit file, the asset you are buying. They know that lender A refuses anything hospitality-related, that lender B will fund a used machine from a private seller and lender C will not, and that lender D moves in five days while lender E takes a month. That knowledge is real and it saves genuine time. Applying blind to seven lenders yourself leaves a trail of credit searches on your file and a fortnight of your life gone.

They also package the application. A lot of small-business finance is refused not because the business is weak but because the submission was thin — no forecast, no explanation of the dip in year two, management figures three quarters out of date. A broker who knows what a particular credit team wants to see will present the same business far better than you will on a Sunday night. If you want to know what that pack contains, what a lender actually asks for before they approve a loan is the checklist version.

The three ways they get paid

First, a client fee: an arrangement or success fee you pay directly, usually a percentage of the facility, typically payable on drawdown. This is the transparent one. It is on the terms of business you sign, and you can negotiate it.

Second, lender commission: the lender pays the broker for introducing the deal. You never see this leave your account, because it is priced into the rate you are offered. It is the one that matters most and gets discussed least.

Third, and less commonly, a retained or upfront fee for work done regardless of outcome. Treat any request for a substantial non-refundable fee before a single lender has been approached as a reason to walk away and find another broker.

The fee on the invoice is the one you negotiate. The commission inside the rate is the one that costs you.

An illustrative deal, with the arithmetic

Take that £120,000 over five years. These figures are illustrative, but the shape of them is not unusual.

Lender A offers 9.9% on an amortising five-year facility. That is a monthly payment of £2,543.71, and total interest across the term of about £32,600. Lender B offers 12.5%: £2,699.75 a month, total interest about £42,000. The difference to you is £156 a month, or £9,362 over the life of the loan.

Now the other side of the ledger. Suppose the broker's commission from lender A is 1% — £1,200 — and from lender B is 3%, or £3,600. The broker earns £2,400 more by placing you with the expensive one, and you pay £9,362 for the privilege. Add a 2% client fee of £2,400 that you pay yourself either way, and the broker clears £6,000 on the transaction.

Nothing about that is illegal, and lender B may genuinely be the only one that will fund you. But you cannot evaluate the recommendation without knowing the numbers on both sides, and the only way to know them is to ask, in writing, before you sign anything. Comparing the offers properly matters too, because rates in this market are quoted in three different languages — flat rate, APR or factor rate explains why a headline that looks lower often is not.

What the rules do and do not require

Here is the part that surprises people. Most business lending sits outside consumer credit regulation. Lending to a limited company is not covered by the Consumer Credit Act at all. For a sole trader or a small partnership, an agreement can be regulated — the business-purpose exemption only applies where the credit is more than £25,000 and the borrower signs a declaration in the prescribed form confirming it is wholly or predominantly for business use. So the small sole trader borrowing £18,000 for a van may well have more legal protection than the limited company borrowing £400,000.

Where an agreement is regulated, FCA rules on commission disclosure apply and the Financial Ombudsman Service is open to you. The ombudsman treats a business as a small business if annual turnover is under £6.5 million and it has either fewer than 50 employees or a balance sheet total under £5 million — thresholds that cover the overwhelming majority of UK private-sector firms. But the ombudsman can only look at complaints about regulated activities, so an unregulated commercial facility falls outside it.

That does not leave you without recourse. In Wood v Commercial First Business Ltd, decided by the Court of Appeal in 2021, borrowers recovered against lenders over commissions paid to a broker that had not been properly disclosed. The court confirmed that a claimant does not need to establish a fiduciary relationship to succeed in a secret commission case, and that disclosing merely that a commission might be paid, without the amount, can leave it a half-secret commission with serious consequences for the lender. The practical lesson for a borrower is simple: get the number in writing at the time, not from a solicitor three years later.

Six questions to ask before you sign the terms of business

How many lenders are on your panel, and how many did you actually approach for me? Which lenders pay you more than others, and how much will you receive on the deal you are recommending? Is your client fee payable if the facility does not complete? Is any part of it payable if I decline the offer? Are you recommending this facility, or simply presenting what came back? And will you put your answer to the commission question in an email?

A broker worth using will answer all six without hesitating, because the good ones have nothing to hide and are used to being asked. Hesitation on the commission question is the single most useful signal you will get.

When a broker earns their money, and when they do not

Use one when the deal is genuinely hard: a sector lenders dislike, a short trading history, a recent loss, a complex asset, or a structure that needs two facilities stitched together. Use one when speed is the whole point and you do not have a fortnight to learn a market.

Go direct when the deal is easy and you are bankable. If you have three years of clean filed accounts, a solid credit file and you are borrowing a modest sum against a mainstream asset, your own bank and two well-known lenders will price it fine and you keep the client fee. Before either route, know what a lender will see when they look you up — your business credit score is the thing that quietly decides which tier of the market you are being shown in the first place.

And whichever route you take, read the security schedule before the rate. A cheaper facility secured by a personal guarantee over your home is not cheaper; it is a different product with a different risk attached to your family. Personal guarantees on business loans covers what you are actually signing.

Common questions

Do I have to pay a broker if the loan does not complete?

That depends entirely on the terms of business you signed, which is why they are worth reading before you send a single document. Most commercial brokers charge their client fee on drawdown, so nothing is payable if the facility never completes. A minority charge an upfront or retained fee for the work of packaging and submitting, payable regardless of outcome, and some charge a fee if you receive an offer and then decline it. All three arrangements are lawful. The one that should give you pause is a substantial non-refundable payment demanded before any lender has been approached, because it removes the broker's incentive to actually place your deal.

Is my business loan covered by the Financial Ombudsman Service?

Only if the activity you are complaining about is a regulated one. Lending to a limited company is not regulated under the Consumer Credit Act, and for a sole trader or small partnership the agreement is exempt where the credit exceeds £25,000 and a business-purpose declaration in the prescribed form was signed. Where the agreement is regulated, the ombudsman is open to you as a small business if your turnover is under £6.5 million and you have either fewer than 50 employees or a balance sheet total under £5 million. Outside that, your route is a civil claim rather than a free complaints service, which is a materially different proposition.

Can I approach the same lenders directly myself?

Usually yes, though not always on the same terms. Some specialist lenders operate on an intermediary-only basis and will not accept applications direct from borrowers, which is one of the genuine reasons brokers exist. Many mainstream and challenger lenders take direct applications perfectly happily. The practical risk of doing it yourself is scattergun applications: each full application can leave a footprint on your credit file, and a run of them in a short period reads badly to the next lender who looks. If you go direct, work out where you fit first and apply to two or three lenders, not seven.

What can I do if I discover a commission I was never told about?

Raise it in writing with both the broker and the lender straight away, asking for the amount and the date it was paid. Where the agreement is a regulated one, an FCA-authorised firm has disclosure obligations and the Financial Ombudsman Service may be able to consider a complaint if you meet the small-business thresholds. Where it is unregulated, the route runs through the courts, and Wood v Commercial First Business Ltd established in 2021 that a borrower need not show a fiduciary relationship to pursue a secret commission claim. Either way, act promptly and keep every email — the delay is what usually costs claimants, not the merits.