17 Jun Small Business Broker Fees

What are Small Business Broker fees?

 

Understanding broker fees from different services small business brokers provide is hazy. To avoid getting overcharged with unnecessary and exuberant fees. You must know the various brokers, including one underground, to see different fees. California is at the forefront in tackling full disclosure on small business lending disclosures. This article will cover mainly small business lending broker fees that aren’t currently fully disclosure on various small business lending. 

 

California passed a commercial financing disclosure law SB 1235 

 

The debate over what the final rules should have finally ended. The Department of Financial Protection and Innovation’s (DFPI) rules approved final rules and published official effective date; the law is scheduled to take effect on December 9, 2022. 

 

Aside from rate disclosures, starting December 9, SB1235 also knows as Commercial Financing: Disclosures Law, will include an entire gambit of small business lending disclosures including alternative business short-term loans, business lines of credit, merchant cash advance, equipment loans, and invoice factoring. Lenders will be required to follow the rules and provide disclosures to any borrowers in California.  

 

Lenders must also disclose broker fees to comply with California Commercial Financing Disclosures Law.  

 

According to the newswire, provided by California Department of Business Oversight (download) 

 

“I applaud the fine work of everyone involved in developing these significant financing disclosures for small businesses,” said DFPI Commissioner Clothilde V. Hewlett. “These first-in-the-nation protections for small business borrowers are a major milestone in financial services oversight in California and a model for other states to follow.” 

 

The California “Disclosures Guide” provides a roadmap for calculating and delivering disclosures, including the format of required disclosures and a row-by-row breakdown of how to fill out the following required disclosures: This piece will focus on broker fees as it relates to this new rules.  

 

• Funding provided; 
• Estimated Annual Percentage Rate (APR); 
• Finance charge; 
• Estimated total payment amount; 
• Estimated monthly cost; 
• Estimated payment; 
• Payment terms; 
• Estimated term; 
• Prepayment; 

 

ITEMIZATION OF AMOUNT FINANCED 

 

Itemized examples should guide lenders on how the format in disclosing fees to yield the true amount the borrower will take home is what they’re trying to accomplish in establishing itemized finance fees disclosures to make it easy to read and understand:   

 

(1) Example disclosure for transactions where no part of the amount financed is credited to the recipient’s account with the financer: 

1. Amount Given Directly to You $8,900  
2. Property Valuation Fee paid to [____] $100  
3. Brokerage Fee paid to [___] $1,000  
4. Amount Provided to You or on Your Behalf (1+2+3) $10,000  
5. Prepaid Finance Charges: Brokerage Fee $1,000  
6. Amount Financed (4 minus 5) $9,000

 

(2) Example disclosure where part of the amount financed is credited to the recipient’s account with the financer:  

ITEMIZATION OF AMOUNT FINANCED  

 

1. Amount Given Directly to You $8,900 
2. Property Valuation Fee paid to [____] $100 
3. Brokerage Fee paid to [___] $1,000 
4. Amount Paid on your Account with Us (#XXXXX) $2,000 
5. Amount Provided to You or on Your Behalf (1+2+3+4) $12,000 
6. Prepaid Finance Charges: Brokerage Fee $1,000 
7. Amount Financed (5 minus 6) $11,000

 

This section will focus on “Section: § 956. Funding Recipient Will Receive” as part of the broker fee disclosure guide. 

 

(a) When a provider provides a disclosure (either directly to the recipient or to a broker) under sections 910 through 917, and the amount financed is greater than the recipient funds, the provider shall also provide a disclosure entitled “Itemization of Amount Financed”. The disclosure shall be substantially similar in form to the example disclosure provided in subdivision (b) below, including at a minimum:  

 

(1) The recipient funds described as “Amount Given Directly to You.”  

 

(2) The amount credited to the recipient’s account with the financer, described as “Amount Paid on your Account with Us” followed by the account number, if applicable. Where the amount to be credited to the recipient’s account may vary based upon changes to the outstanding balance due on the recipient’s account, a disclosure shall be considered accurate if it is accurate at the time the disclosure is provided.  

 

(3) Any amounts paid to other persons by the financer on the recipient’s behalf, each listed on a separate line. The disclosure shall identify those persons. The following payees may be described using generic or other general terms and need not be further identified: a recipient’s supplier or retailer, public officials or government agencies, credit reporting agencies, appraisers, and insurance companies. Where an amount disclosed pursuant to this section may change based upon changes to the outstanding balance due under the recipient’s other obligations, a provider’s disclosure of a payoff amount shall be considered accurate if it is accurate at the time the disclosure is provided.  

 

(4) The sum of the amounts described in paragraphs (a)(1), (2), and (3), described as “Amount Provided to You or on Your Behalf”, followed by a  

reference to how the amount was calculated (e.g., “Sum of Items 1-7.”).  

 

(5) The prepaid finance charge, described as “Prepaid Finance Charge” or “Prepaid Finance Charges”, as applicable, followed by a description of the purpose of the charge or charges (e.g., “Brokerage Fee”).  

 

(6) The amount financed, described as “Amount Financed”, followed by a reference to how the amount was calculated (e.g., “Item 5 minus Item 4.”).  

(b) (1) Example disclosure for transactions where no part of the amount financed is credited to the recipient’s account with the financer: 

, The disclosure required by subdivision (a): The recipient funds, described as “Amount Given Directly to You.”  

(1) Shall appear as a document separate from the disclosures required by sections 910 through 917; 

 (2) Shall appear immediately following the disclosures required by sections 910 through 917;  

(3) Need not be signed by the recipient; and  

(4) May include a description of any assumptions the provider used to make the disclosure below the information required by subdivision (a). 

 

To get the lowest broker fees, know that with the new Disclosure Guidelines, you will learn how much Brokers earn from your transaction.

Being charged for applying for a loan in addition to the typical origination fees, admin fees, and title fees will no longer be a mystery in California.  

Like real estate transactions, broker fees from both sides of the buyer and seller spectrum are represented that come w/ fees incurred during the transaction, with some exceptions. Hopefully, that’s next to were not only fully disclosed but regulated on how much a broker can charge for facilitating small business funding. Commercial lending will forever change due; however, the consultancy operation will increase as charging upfront for services such as “finder’s fee” in lieu of broker fee will increase as no one can make a living doing deals for 5% on a $10,000 loan unless you have massive volume. Still, smaller loans usually take as much time to underwrite as bigger ones, which will disincentive small business lenders from lending to smaller clients. 

My prediction is business lending disclosure will negatively impact the industry and the economy. Short term rate will always be higher. Commercial loan rates will always be higher. Adding the word “commercial” to anything automatically costs more than a typical consumer would get charged even for the same or similar service, cable, or internet, for example. The market dictates the rate. When consumers see a higher rate, they’re discouraged from taking action. Less likely to invest. Less likely to take the risk. Less likely to gamble. The shock to the market will have significant lenders exiting the market before the market, and the rate can find its equilibrium. The current demand for small businesses is bright. Life on the horizon due to government interference will shock small business borrowers and limit those on the fence and those who are “interest rate” conscious or have low profit or gross margin. In this situation, business expenditure will reduce, causing an impact on the overall health of the economy.