If you read my last post on first-position revenue-based lenders, you now understand the basic product: short duration (usually 9–18 months), fixed daily or weekly payments, underwriting based on cash flow, and a business model that runs on renewals.
What I did not cover in that post is the part most small business owners never see: how much of this market is driven by brokers, and how that changes the incentives for everyone involved.
I’ve worked with brokers on thousands of deals. I’ve seen up close and personal situations where no healthy borrowing argument exists and yet the “solution” is still a loan. Not because the broker is evil. Because the broker’s business model only pays out one way.
If all you have is a hammer, everything starts looking like a nail.
The simplest truth: brokers only get paid when you borrow
A broker can be friendly, responsive, knowledgeable, and still be structurally incapable of giving you unbiased advice.
Why? Because brokers don’t get paid for:
- telling you not to borrow
- telling you to cut expenses
- telling you to collect receivables faster
- telling you to raise prices
- telling you to pause expansion
- telling you the honest truth: “this business is not in a position to take on fixed weekly payments”
They get paid when you sign a deal.
Even when the broker is trying to be “helpful,” the incentives are misaligned. There is no version of brokering where the broker survives financially by recommending not borrowing.
And yes, commissions are often large. The bigger issue is not the exact percentage. The issue is that those fees create a natural gravity toward “bigger loan, faster close, repeat customer.”
What brokers do to a first-position market
If you’re a first-position lender, brokers are a distribution channel.
They bring you volume. They also bring you problems.
Because brokers are not underwriting risk. Brokers are underwriting commission.
So the broker’s job becomes:
- find a business that can be approved somewhere
- push it into a product that will fund fast
- maximize the deal size
- keep the borrower borrowing
That last point matters. First-position lenders love renewals. Brokers love renewals. So the entire ecosystem can quietly turn into a renewal machine that has very little to do with whether the borrower is actually getting healthier.
This is why you see so many “working capital” loans function like a treadmill. If you borrow once and repay cleanly, you become a high-value target for the next deal. Then the next. Then the next.
A business can stay alive for a long time on that treadmill. It can also get quietly destroyed on it.
The adverse selection problem nobody talks about
Here’s the uncomfortable reality: brokers can create adverse selection for lenders.
In plain English: broker-sourced deals tend to be worse on average than direct deals. Not always. But often.
Why?
A direct borrower who applies on a lender’s website is usually:
- less desperate
- more price-sensitive
- more willing to shop
- more likely to walk away
A broker-sourced borrower is often:
- in a time crunch
- already turned down somewhere
- confused by pricing
- more likely to accept “whatever works”
- sometimes already stacked, or about to be
When that’s your pipeline, you’re naturally seeing a riskier pool.
So what happens?
First-position lenders build two channels with two different realities:
- direct channel: the lender’s “ideal” customer base
- broker channel: volume, but often lower quality and more chaos
And then you get the perverse thing I’ve seen repeatedly:
A lender will sometimes approve deals from brokers that they would be less enthusiastic about approving through their own direct channel.
Why would they do that?
Because lenders manage broker relationships like any other revenue channel. Brokers can redirect future deals. Brokers can “punish” lenders who decline too much. Brokers can flood lenders with low-quality files until something sticks.
So lenders face a choice:
- underwrite purely for quality and risk losing broker volume
- or accept marginal deals to keep the broker channel happy
That’s adverse selection in real time. It’s not theoretical. It’s not a conspiracy. It’s incentives.
Why lenders “put up with it” (and don’t fix it)
Small business owners often ask: if brokers add cost and noise, why do lenders tolerate them?
Because lenders aren’t sitting on infinite demand. They need deal flow. They need predictable origination. They need marketing channels that work.
Brokers provide that.
Also, lenders have a problem: if they try to disintermediate brokers too aggressively, brokers can retaliate by steering borrowers elsewhere.
So lenders will complain privately about broker behavior, but they rarely want to take the hard step of actually breaking the ecosystem.
And even more importantly: the lender’s incentives are not the borrower’s incentives.
If a deal performs, the lender gets paid. If it refinances, the lender gets paid again. If the borrower stays in the ecosystem, the lender gets paid repeatedly.
That does not mean lenders want you to fail. It means their definition of “success” can be very different from yours.
Your definition of success is building a durable business with resilient cash flow.
A lender’s definition of success is a borrower who repays and renews.
A broker’s definition of success is a borrower who signs.
Those are not the same thing.
“You have a business problem, not a funding problem”
This is the part that brokers can’t say out loud.
I’ve seen countless situations where the correct answer was not more capital. The correct answer was:
- fix pricing
- cut costs
- stop bleeding payroll
- renegotiate supplier terms
- collect receivables faster
- reduce SKU complexity
- pause expansion
- close a location
- fire a manager who is killing margins
- raise prices even if you lose customers
Those are business problems. Not funding problems.
A loan can smooth cash flow gaps. A loan can buy time. A loan can fund growth. But a loan cannot fix a structurally unprofitable business.
Brokers don’t get paid to say that. I do not have that problem.
If you’re taking on fixed weekly payments in a business with weak margins or declining revenue, you’re not “solving” anything. You’re borrowing against the future to pay for the present.
Sometimes that bridge leads somewhere. Sometimes it leads straight into a wall.
Why “borrowing” is always the broker’s recommendation
The most dangerous thing about brokers is not that they lie.
It’s that they don’t need to lie.
They can simply emphasize one truth and ignore another.
They’ll say:
- “This will help you grow.”
- “You can invest in marketing.”
- “You’ll have more inventory.”
- “Cash flow will improve.”
What they won’t say is:
- your margin might not support the payment
- you might be turning a short-term slowdown into long-term leverage
- you might be entering a renewal treadmill
- stacking might quietly destroy you
- you may be violating covenants in existing financing
When you only get paid on funded deals, there is no reason to highlight the downside.
Again: if all you have is a hammer.
What to do instead: apply direct, force pricing transparency, and sanity-check the whole idea
If you need fast capital, fine. First-position lenders can be a tool. But you should still do it like an adult.
- Apply direct to a small set of credible lenders (no middlemen, no mystery fees).
- Compare offers apples-to-apples. Same term, same payment frequency, same total payback.
- Convert factor rates to APR so you’re not negotiating blind.
- Refuse to stack anything until you understand what multiple fixed withdrawals do to cash flow.
- Avoid paying hidden fees for the privilege of being pushed into a deal.
And here’s the part most people skip: before you borrow at all, run your situation through Diogenes.
Diogenes is built to do what brokers can’t: it’s not paid when you take a loan. It will absolutely recommend lenders when borrowing makes sense, but it will also tell you straight up when borrowing is a bad idea, and push you toward the real fixes first (cut costs, improve collections, adjust pricing, slow expansion, whatever actually applies).
If you want a practical walkthrough of how to avoid the broker layer entirely, read this:
How to Get a Business Loan Without a Broker
And if you want to see what a factor rate really costs, use this:
APR Calculator
The takeaway
First-position revenue-based lending is not mysterious. It’s a cash flow product with short duration and fixed payments. The market sweet spot exists because it supports renewals. Capital recycling is the engine.
Brokers thrive in this ecosystem because:
- they get paid when you borrow
- “no” does not feed their family
- they can steer volume to lenders who say yes
- lenders sometimes accept marginal deals to keep the channel alive
If you’re a small business owner, you should assume one thing is always true:
A broker’s recommendation will almost always be borrowing, because borrowing is the only thing that pays them.
Sometimes borrowing is correct. Often it isn’t.
If you want an unbiased answer, you need a framework that is not paid by the act of borrowing.
That’s the whole point of brokerfreecapital.ai
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