Brokers Get Big Commissions for Selling Entrepreneurs Costly Loans

By Patrick Clark March 31, 2014

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CAN is hardly alone in paying high commissions. World Business Lenders, a New York-based company, lets brokers add up to 14 percent of the loan amount on a six-month loan, according to a document describing its commission structures. A “substantial majority” of borrowers come to the company’s website directly, spokeswoman Anjali Arora said in an e-mail. She added that the company “is sensitive to the total cost to the small business of accessing credit.”

OnDeck, which has raised $180 million in venture capital from investors including Google Ventures and Institutional Venture Partners, lets brokers add up to 12 percent of the loan amount, according to spokesman Jonathan Cutler. He says that on average, the company’s independent brokers earn commissions of 7.5 percent.

Many in the alternative lending industry don’t see rich broker fees as a problem. Most “reputable companies” don’t let brokers tack on more than 12 percent of the loan amount in extra costs, says David Goldin, CEO of lender AmeriMerchant and president of an industry trade group called North American Merchant Advance Association. He says independent brokers can struggle to break even, given what they spend on advertising and other costs. RapidAdvance CEO Brown says some brokers accept lower commissions to reduce business owners’ borrowing costs.

Entrepreneurs such as Ballentine hope to drive broker fees down. Ballentine, a former broker himself, launched Buynance in February to let borrowers compare loan offers from multiple lenders. Jared Hecht, who sold his previous company to Skype for $80 million in 2011, launched a site called Fundera in February to help business owners select the best deals from lenders including CAN, OnDeck, and peer-to-peer lender Funding Circle. Both companies charge fees that top out at 3 percent of the loan amount, a fraction of what brokers collect.
Brokers’ high fees show that small businesses need better solutions, says Fundera’s Hecht. “In other industries, the Internet replaces the broker,” he says, noting that websites such as Kayak and Priceline succeeded by giving travelers price transparency they didn’t get from travel agents. That hasn’t happened for small business loans yet.