"Broker Commissions"

by Linda P. Kester

After talking to some sources I have found that the general range of points paid is from 3% up to 20%. Balboa and Main Street pay up to 20%.

I'll take on the role of investigative reporter to provide you with more info on this subject. Please share your knowledge of typical points and deal sizes (I'll keep you anonymous if you like), I'll compile a summary and share the information in a follow-up article to make us all more knowledgeable on current industry trends. linda@lindakester.com

Why do funding sources limit the amount of points paid on lease transactions? After all, if it passes their (often arduous) credit test, and if the pricing is right, then what's the problem? Brokers put a lot of time and effort into getting leases through the process, all the way to funding-they should get paid for their efforts.

Often brokers are forced to reduce the points significantly due to rate pressures. When the deal can handle it, they should be able to keep the extra points. So why do funding sources often limit their payouts to sometimes as low as 10 points or less?

And why are those who are trying to attract brokers willing to pay 20% or more?

As someone who has worked for a funding source for many years, I can tell you their logic in limiting the size of the commission. First, they feel that if a deal has excessive points built in, there must be something wrong that the credit process did not uncover. They could feel as if those 20 points you built in is your fee for hiding the fact that the owner of the prospective lessee completed the credit "app" from his jail cell. And even though 20 points may be high, they feel that on average, leases that come with 20 or more points built in are going to perform worse than those with 5 points attached. I think we would all agree there is some logic to that.

Some of the story credit companies limit their fee to 2% or 3% as they know the tough credit will sign anything to get the lease and the lessor thinks that if there is to be a default, paying 10% to 20% in commissions will be too costly for them.

So, the issue really is where the limits should be or if they should be determined on an individual basis.

Many lessors have different equipment cost categories for their policy on points. A common break is transactions over $100,000 and under $100,000, allowing more points on smaller deals. A different standard for deal size makes sense. Usually price sensitivity is less on smaller leases so building in more points should not be as much a red flag to the funding source. Using 20% as an example, certainly paying out $2,000 on a $10,000 deal should not create the kind of worries as paying $20,000 on a $100,000 deal.

On some higher priced transactions the point cap should be determined individually. Many banks limit transactions over $100,000 to 5% to 8%. Some funding sources even make it a 5% security deposit to the lessee, which in reality is the broker's commission.

Today's funding source is typically doing more due diligence, so there is less chance that they would miss some obvious flaw in the deal. Some perfectly viable credits can be very time-consuming and expensive to put together. For example, transactions with letters of credit or a foreign guarantee can be very costly to process... You should be compensated for this accordingly based on the individual circumstances without an arbitrary maximum that applies to all leases.

Using that same logic, it probably makes sense for larger funding sources to set a standard policy for smaller deals. Often, these are put through a pass/fail credit scoring process where a minimal amount of credit information is reviewed. They would not consider it reasonable or in their best interest to determine which deal can handle 20 points and which can only handle five.

So the question comes down to what would be a reasonable cap for smaller deals? It would be easy for a funding source looking for better credits to have a low threshold like 10 or fewer points. This would not be the best strategy, however. There are a lot of solid brokers with great reputations who would shy away from these funding sources because of the caps. Certainly it would be a drawback if they weren't offering some other significant value in exchange.

I think the best strategy for a major funding source is to set a relatively high point cap for brokers and then monitor the mix of credits performance and point totals that they see come from each broker. I would suggest that if a broker is at or near the cap on all their deals than they would warrant further scrutiny, but the broker who has the flexibility to occasionally make a larger profit on a transaction would feel as if their funding source was reasonable.

Please share your knowledge of typical points and deal sizes (I'll keep you anonymous if you like), I'll compile a summary and share the information in a follow-up article to make us all more knowledgeable on current industry trends. Send your input to linda@lindakester.com

Linda Kester helps leasing companies increase volume. For more information visit www.lindakester.com .