The increased capital costs that have forced some lenders to pull back from equipment finance are giving rise to a higher volume of broker and intermediary transactions in what some are calling the “last Wild West of business.”
Equipment brokers connect consumers looking to buy equipment with third-party financiers that have the capital to lend. Brokers play a key role in consummating transactions, Kit West, business development director of broker relations at “broker-centric” equipment lender C.H. Brown, told Equipment Finance News.
Customers also turn to brokers to keep other credit lines free, Steven Geller, owner of equipment finance intermediary and management consulting firm Leasing Solutions, told EFN.
“The customers are better served getting equipment financing — which is usually three to five years — from third-party funding or a broker and leaving the bank line available for short-term working capital needs,” he said. “What brokers do in the industry is, many go out and find vendors and offer the service to vendors.”
Wheatland, Wyo.-based C.H. Brown markets almost all of its finance offerings to more than 500 brokers and gets deals from 120 brokers a year on average through a stringent vetting process, West said. In fact, 80% of the lender’s largest transactions by value come from the top 10% to 20% of brokers by volume, though the lender also works with startup brokers.
The broker industry “is one of the last Wild West [sectors] of the business industry,” largely because anyone can become a broker, West said.
“If you have a cell phone, a laptop and a room to sit in, you can start a broker business,” he said.
Navigating the “Wild West”
The business is lucrative, West said, noting that some single-broker operations do as much as $40 million a year in business, despite the current constrained lending environment. For context, equipment lender Balboa Capital allows equipment finance brokers to make up to 15 points of commission per transaction, according to the company’s website.
However, with opportunity inevitably come unsavory players, West said. “There’s going to be some [brokers] that come into the industry … with some nefarious reason for being there. They’re going to try and scam people out of something — but that’s in every single industry.”
Vetting is key for lenders and vendors looking to protect themselves from brokers with malicious intentions, West said. C.H Brown relies on references, brokers’ applications and social media for this.
“I will call [references] and talk to those folks to get an idea of how [a broker] is to work with,” West said. “We pull credit. We apply the same credit principals we use in our underwriting to our vetting process.”