Sales Make it Happen
Broker Commissions - Follow-Up Report
By: Linda P. Kester
In my initial article about broker commission three main questions were raised:
- Why do funding sources limit the amount of points paid, sometimes as low as ten points or less?
- Why are some funding sources who are trying to attract brokers willing to pay 20% or more?
- Should there be a cap for the amount of points paid, or should it be determined on an individual basis?
My answers were:
- Funding sources feel that excessive points must mean that there is something wrong with the deal that has yet to be uncovered.
- Funding sources think, on average that leases with twenty points built in will most likely perform worse than deals with five points.
- Some "story" credit companies limit the amount of points (two or three percent) because they feel the lessee is so hard up for the equipment that they will agree to any rate. In addition, a 20% commission will make it that much more difficult to recover equipment cost on a repo.
- On large dollar amount transactions the point cap should be determined on an individual basis.
- Brokers should be compensated on individual circumstances for deals that are more costly to process without an arbitrary maximum. Bottom line, funding sources should set a relatively high point cap & monitor the performance of the portfolio.
Our Informal Poll Results
A large number of Leasing News readers responded to my request for information on this subject. Most were willing to share their knowledge as long as they could remain anonymous. What I discovered is that there are a multitude of variables that go into this decision making process on both the broker and the funding sources sides. The variables include:
- Type of credit
- Reliance on collateral
- Funding rate
- Size of deal
Most broker responses were straight forward; here are four responses from Brokers:
- "Over the years, we try to set fees in relation to the amount of time & effort required to get the lease approved, keeping the fee at a level when added to our cost of funds, results in a lease that is priced within comparable going market rates. We never price to "skin alive" any of our clients as we are not a one time lessor....we seek a relationship. Our transaction size runs from about $10,000 to over $1,800,000. .........Origination fees will range from 5% or 6% on the smaller deals to 2% or 3% as the lease size increases. Many times the structure of the lease will allow for an increased fee...when payments are compared to other types of financing. We try to be creative. With some funding sources, we discount the stream of payments. This results in more front end profit and/or some residual ownership.
"I typically deal with transactions less than $100,000 and average about 8 points. Customers with poorer credit are charged more; better credits have more options. So to be competitive, I usually charge less. If I can occasionally make a larger profit on a transaction, I will; and I think it is reasonable to do so.
"One sometimes overlooked fee is the doc fee. We have typically charged $295 for probably 3 yrs and it usually adds up to a few more bucks or at least is enough to include some funding source fees too!
"Our average commission was always in the 8% range and that was for average size deals of $35-40,000.
"Obviously on really small deals we couldn't get away with the bigger doc fee, but the commissions certainly shot up to 15% pretty fast.
"Deals under $50K I generally put 7 points in. Deals between $50K and $100K I put 4 points in. Over $100K I charge 2 or 3 points depending on how rate sensitive the customer is.
"Hope that helps you. I'm probably cheap because I hear a lot of brokers charge 10 points on most deals. I believe in keeping the customer for life and if you are fair with them on the first deal, you will get all their future business."
- "Less than $75,000: five points. Will try to push for seven."
- "$100,000: two to three points. Most people are trying to figure out how much more they can get without losing the deal."
Many brokers are reluctant to share specifics because they think if they say "I got 15 points on a $45,000 deal." The next broker will say, "I got twenty on the same type of deal"; while the broker standing in the corner eavesdropping, says "I got 25, you guys are schmucks."
That being said, there were the brokers who have strong ethical concerns. Stating,
"Don't hurt our industry with your pricing." "Just because a lessee is 'financially challenged' (not knowledgeable in the ways of finance) doesn't mean you should add in 20 points and try to get a couple more deals before they go out of business."
This forces the question: "How much is too much?"
In my opinion it depends on how much value you add to the transaction. Pricing should be inherently fair. If you bring something to the deal the lessee couldn't bring on his own, then you charge more. If it's strictly a commodity then you should get less. The bottom line is to know what you are charging and know why. The more educated the leasing sales rep is, the more they know where the pricing should be.
Start Your Own Leasing Company?
Another question posed was: "Is it still a valid concept to start your own leasing business in order to make a greater percent of commission?"
As long as you take all factors and expenses into consideration it is a viable option. This can be done on both a broker level and a funding source level. I have a friend who had such a tight relationship with a vendor that she became a broker, just to service that account. On another level, when senior management left Advanta Leasing to start Marlin Leasing, one of their motivations was to stop making so much money for their parent, Advanta Corp., and start making money for themselves.
Funding Source Responses
One funding source stated that this is really a concern of "application only" business. I tend to agree with this statement because with "application only" business the sales rep has more control of the rate. One reoccurring theme was that it's difficult to get a higher percentage of points on a large dollar amount transaction. The majority of leasing companies go up to $150,000 "app only". There are some who advertise up to $250,000 app only. Other captive companies offer $350,000 app only.
The following is a sampling of the feedback from funding sources:
- "We are an "A" credit funder, or so we believe. Our dollar range is 10-75K. The average points paid to a broker are 7.8 points."
- "Your article is specific to credit quality as a concern over commission limits. Certainly, every credit officer would shudder if they knew a deal they approved in one part of the building was getting maxed out from a commission standpoint at funding, in another part of the building. Generally, that does not occur...especially in app only [leases].
"Only when introduced in a loss review session would the excess commission become a part of the discussion as to why a loss has occurred. We did not expose our credit officers to the details of individual losses and certainly they would not have seen the data to support the correlation. However, we studied the data at the executive level and it revealed a higher propensity for losses when commissions exceeded 20% although there was not a strong correlation between credit quality and excess commissions. Fortunately, very few transactions are ever priced at that level of payout.
" It is interesting to note that a large percentage of the brokers we talk to today see our 20% cap as a value add. The fact is the average payout is much less than our cap, although we do see an occasional deal with the max priced into it so I would conclude our stated limits are more optical and emotional than rational. Why do so many people participate in lotteries? It is the dream that they have a chance to hit it big when in reality they likely understand they will not. "
I would suggest that the larger reason a funder caps commission is because of the economics of the deal. If you are holding a portfolio your advance rate is never 100% so you must put equity into every transaction you fund. The higher the commission payout, more equity must be included into the deal. Because of liquidity issues, lenders may decide to limit the amount of their advances. The reality is the treasury function directs more of this type of policy than credit within an organization.
The other aspect of the argument is entirely emotional. We are all consumers and we tend to want to follow the "do unto others" rule. It is unfortunate that some folks in our industry do not adhere to that standard instead opting to go for it all when presented with the opportunity. Perhaps their mortgage payment is on the line, or past due child support is looming large over them. Whatever the reason, it happens and often with little remorse. With the commission caps the lender is drawing the line for the broker and telling them what their tolerance level is for how they treat their lessee. "
"Regarding Points our limits are as follows:
"10K-50K: 8 Points
"50K-100K: 5 Points."
"We limit the points we pay out due to (1) limiting the amount of 'air' in a transaction especially when we require a larger down payment on a structured deal. (2) being part of a bank, we never want to be put in a position of defending why a lessee was paying a 25% interest rate."
"We're one of the "high risk" deal lessors..we pay 2-3 % depending on how much volume a broker gives us.that is .deals that actually get done, not just sending or showing deals."
This issue did touch a nerve. Other questions I received included:
- If the funder gets their yield what do they care how much I get on top of that?
- Does a higher commission mean less of a return in a default?
- How high will the "split" go to get broker business?
I'll address each of the above questions in a subsequent article. Again, if you have an opinion on this subject be sure to e-mail me at Linda@lindakester.com
- Has the role of the salesperson changed that they can obtain a higher commission and part of the residual?