Brokers and Middlemen - Facts & Fiction

Are brokers and middlemen in the financial industry as evil as society tells us they are? The answer is "No". Brokers and middlemen serve an essential function in today's financial system. They help make our system more efficient and allow borrowers and lenders to benefit from economies of scale. We will examine the facts and fictions regarding middlemen and brokers in the equipment leasing industry.

There is a stereotype pervasive in the financial world that middlemen provide no benefit to either borrowers or lenders and do nothing more than stand in between the two parties in order to siphon money off the transaction for themselves.

Let's examine this accusation shall we?

First, I think it's safe to say that if brokers did not provide an essential function, they would not survive for long. That is the nature of business. Of course that leads us to the inevitable question, "what is the essential function that brokers provide?"

Like all businesses, lenders have a target market and a niche. In other words...they specialize. A good broker will have relationships with a variety of different lenders...each having their own niche. This broker will be able to pair you up with the lender that is the best match for your transaction. As a borrower, if you were to go direct to a lender who really wasn't a fit for you, you will wind up paying more money than you should. Had you gone to a lender who specializes in providing financing for the type of transaction you are trying to do, you would have received more favorable terms.

Brokers do earn a living by providing this service. This is not a philanthropic enterprise. A common misunderstanding is that had you gone directly a lender you would have avoided paying points to a broker. The truth is that brokers can get you more favorable terms than you would otherwise get directly from the lender due to the broker's long-standing relationship with said lender. Brokers help lenders become more efficient because they only send lenders deals within the scope of that particular lender's niche.

Another industry myth is that direct lenders do not charge points since they make their profit by charging interest. This is not true. Direct lenders do charge points. Here's how it works:

A lender will have what's called an Internal Rate of Return (a minimum interest rate) that they are required to charge their clients on loans. Anything that the buyer signs up for above and beyond that internal rate of return will go to pay a commission or a bonus for the representatives involved in the transaction. They are motivated to charge the client the highest rate they possibly can since the representatives involved in the deal earn the spread between the internal rate of return and the rate paid by the borrower. In other words, the points paid by the borrower are rolled into the loan.

Since brokers pre-screen deals, submit deals in volume, and do their own marketing, lenders' overhead is greatly reduced. This reduced overhead causes the internal rate of return to go down for transactions submitted through a broker. Often times, a broker will assume some of the risk of default allowing the lender to reduce the internal rate of return even further since the lender's risk exposure has been reduced.

This process benefits borrowers, lenders, and the financial markets as a whole. It allows lenders to reduce overhead, increase volume, and reduce risk. The end result is that everyone benefits from economies of scale.

Eric Johnson
Account Manager
Dimension Funding, LLC
Dimensionfunding.com
Phone: 949-608-2247
ejohnson@dimensionfunding.com