Brokers can add value to a deal by working collaboratively with lenders rather than at odds with them.

Private lenders rely on loan brokers for deal flow and assistance in stacking files. But, a broker’s benefits can often be eclipsed by the problems some brokers cause. On one hand, it’s important for a broker to be engaged and to add value to justify any fee; however, the broker must recognize the lender’s protocol and know when to step aside.

In order to be a boon to lenders without burning bridges, here are a few guidelines for private loan brokers:

1. Don’t claim you’re a lender // It’s bad for the industry when loan brokers misrepresent themselves as a direct money source. Brokers get creative by titling themselves in a way that confuses borrowers. For instance, many say they “provide capital to borrowers seeking real estate financing.” It can take weeks for a borrower to realize that by “provide,” the broker meant they would make an introduction to the capital source (or, ironically, another broker).

There aren’t many things as frustrating to private lenders than when a deal is submitted from a broker who has already taken an upfront fee. If the lender then contemplates a legitimate fee for real travel or legal costs, the borrower is less likely to pay a second fee.

Borrowers and lenders alike respect brokers much more for being transparent. Establish yourself as an intermediary that lenders want to do business with and borrowers know they can rely on. Add value in exchange for a success fee.

2. Don’t overvalue yourself // Regardless of how valuable a broker is to a transaction (and yes, we know the parties would have never met without you), understand that lenders who write checks are taking risks that outweigh the value of an introduction. Brokers who beg beyond industry standards for as much compensation as the lender makes are simply delusional.

When a lender makes a loan, that capital, whether it be funded by an institution or individual, represents hard work. Someone made that money and trusted a manager to make a loan with it. Most lenders don’t even make money until a loan closes, but there are brokers who try to justify their “time is worth more.” Time, even effort, pale in comparison to the weight of liability and fiduciary responsibility. Brokers should be reasonable in what they expect and charge, especially if there is a chain of multiple intermediaries expecting to be paid.

3. Pick a lane // The most successful brokers know a select group of go-to sources, and they stick to what they know. “Feast or Famine Brokers” claim to do everything and spend their time peddling deals that have a low likelihood to close. It’s a poor practice for brokers to market services not only as a direct source, but one that does every type of deal, internationally, at the best terms possible. These brokers believe that if they claim to do it all, they’ll capture and control all the deal flow. In reality, if deals sit on the wrong desk for too long, the market for that deal often dies while the broker tries to deliver on the promises that attracted the borrower in the first place.
4. Let the lender do his or her thing // Get your NDA or fee agreement in place, and ask the lender how they wish to communicate with the borrower. Many lenders want to speak directly to the borrower from the beginning of the underwriting process, present their own terms and communicate with unlimited access to the borrower. If this is the case, have confidence in your agreements and require that you stay in the loop, but provide the space needed for the lender to make a decision. Other lenders prefer to filter information through the broker. Brokers should follow the lenders’ lead and convey things exactly as instructed. Too often, brokers are charged with a task of conveying information and requests but end up lacing the loan package with their own influence.
5. Don’t pilfer the credit // Rather than giving credit to those who extend credit (lenders), brokers sometimes represent themselves as the funder out of fear that prospective borrowers will apply directly. It is OK for brokers to make public announcements about their services, but they cross the line when they use a lender’s performance as their own. Brokers providing more of an active role have every reason to use that experience to attract more business, but they should clearly define who did what in getting the deal closed.
6. Be tenacious, not rapacious // Brokers should get into the habit of following up with the borrower every day or two to collect what the lender is requiring. That kind of tenacity is an asset to any deal. Brokers should refrain from badgering a lender for an update when a system is clearly outlined. There are always brokers who demand to be the lead on every phone call, which gets in the way of principal-to-principal interaction. Pre-empt what the lender may request, but never extend promises or commitments until instructed otherwise. Work with the lender to collect all the needed items quickly. Brokers who bombard each side with information and questions sometimes appear desperate. There must be a balance between not communicating enough and wasting everyone’s time.
7. Be loyal // Brokers should make decisions that ensure future business from lenders and borrowers. Too often, brokers will take a side that isolates them from doing business with either party in the future. If a deal dies or changes because the lender identifies risks that weren’t previously discovered, brokers should argue that decision. If a borrower finds a better lending solution than the one the broker is pursuing, the broker should show support rather than disdain. It should be evident to lenders and borrowers that the broker truly wants the best for his or her client. Constructive advice or counsel is one thing—but disagreeing with a lender’s terms, structure or decision shows immaturity and will likely end the relationship.
8. Be wise with your resources // As brokers taste success, it is prudent to set aside a portion of the income to build a business. Brokers have a hard time making the jump to a more credible business because when a deal closes, there is a tendency to “catch up” or buy a new car. And when brokers get a taste of success in private lending, their appetite grows. Not enough brokers determine ways to bring a consistency to their income by standardizing systems. Few brokers commit to a discipline they know can pay dividends. Brokers who define their business and stay the course have a better chance of building a reputation in the industry.

Loan brokers are an important component of the private lending industry. Following the tips included here will ensure that relationships and value are mutually beneficial. ∞