“If you can’t spot the sucker at your first half hour at the table, then you ARE the sucker.”
— Mike McDermott, Rounders (1999)
When small businesses seek funding online—especially through brokers—most of the deals they secure fall under a category known as “revenue-based financing.” Within this category, you’ll find various deal structures, including loans, merchant cash advances, or the purchase of future receivables. The differences between these structures aren’t as important as their commonality: they’re all priced using a rate factor, sell rate, or a cents-on-the-dollar methodology.
For example, you might receive a loan offer for $100,000 with a total repayment of $120,000 over 12 months. This would be described as a rate factor or sell rate of 1.20, or 20 cents on the dollar. But what often isn’t clear to you is how brokers take advantage of this pricing structure to add hidden costs to your financing.
How Brokers Hide Their Commissions
Brokers use the sell rate pricing methodology to slip their commissions into the deal. In the scenario mentioned above, if you work with a broker, the offer might come back as $100,000 with a total repayment of $130,000 over 12 months, which translates to a sell rate of 1.30, or 30 cents on the dollar. The extra $10,000 (10% of the total funding) is purely the broker’s commission, but you won’t see that breakdown. All you’ll see is the total repayment and the sell rate. This leaves you in the dark about how much of your loan is actually going to the broker.
Who Really Gets Paid?
In a deal like this, assuming you make all your payments, the lender will earn $20,000 over the life of the loan. But the broker? They’ll pocket their $10,000 commission, usually upfront, and walk away. And here’s the kicker: brokers rarely tell you that $10,000 of the cost is purely for their commission. I know this because I’ve personally facilitated thousands of these transactions while working for a lender and managing broker channels. Not once were clients told how much of their cost of capital was going to the broker instead of the lender.
The Mechanics of Broker Commissions
So how does this work behind the scenes? Lenders set a buy rate on the deal—this is their cut, which in our example would be the 1.20 or 20 cents on the dollar. The broker is then allowed to tack on a certain number of points, typically up to 10 or 15. What you see, though, is the sell rate—the total repayment with the broker’s commission built into it. What you don’t see is the difference between the buy rate (what the lender is actually earning) and the sell rate (what the broker is charging you).
What About Traditional Lenders?
Now, most reputable brokers and marketplaces also work with a variety of funding sources, including banks and credit unions. These institutions don’t use the sell rate methodology; they take a more “traditional” approach by quoting you an interest rate, like 8%. In a bank loan, it’s impossible to hide the broker’s commission in the pricing, so instead, brokers charge a separate “packaging” or “broker” fee—typically far lower, usually no more than 1-4% of the total funded amount.
But here’s the catch: traditional products from banks and credit unions have much lower approval rates and take far longer to close than revenue-based financing. So, where do brokers put their time and energy? Naturally, toward the deals that close faster and make them more money—revenue-based financing.
The Real Cost to Your Business
This structure creates a significant problem for small business owners like you: you think you’re getting a good deal because the broker presents the total repayment as a simple number, but you’re actually paying a hefty premium for their involvement. And the kicker is, they don’t even have to tell you how much they’re taking in commission.
In an already costly funding environment, adding broker commissions on top can turn what might have been a survivable financing deal into an unsustainable one. This hidden cost is the reason so many small businesses end up paying far more than they should for funding.
Final Thoughts
When you’re shopping for financing, remember that transparency matters. The total repayment figure a broker presents is not the whole story. The next time a broker pitches you a deal, consider asking for a breakdown of the buy rate and sell rate, or better yet—cut out the middleman and go directly to the lender. By doing so, you’ll have a clearer understanding of the true cost of your funding, and you’ll avoid padding a broker’s pocket at the expense of your business’s future.