If you’re thinking about arranging recruitment funding to finance your temporary or permanent recruitment activities, there’s a reasonable chance that you will come across one or more finance brokers. Unless your funding requirements are particularly unusual or complicated, it is unlikely that your finance broker will ask you to pay for their services. You may therefore be questioning how they get paid for the time they spend in obtaining quotes and providing a recommendation as to the best recruitment funding provider for your business. Of course, the answer is that they are paid a commission or referral fee by the lender for introducing you to them.
How much is a typical referral fee?
The fee level depends on the specific deal which the broker has in place with the relevant lender and the type of funding product which you require. However, some lenders are known for paying particularly large referral fee percentages, which inevitably leads to other lenders increasing their referral fees to remain competitive.
Let’s use the example of one of the largest players in the invoice discounting sector. If your business wanted to fund £2,000,000 of invoices per annum, which isn’t unrealistic for a small temporary agency, you might pay a 1.5% service charge to the lender i.e. £30,000. In the case of one particular clearing bank, your broker is likely to earn up to 40% of the £30,000 service charge, which is £12,000 in fees.
How long does the arrangement last?
The great news for the broker is that the referral fees will usually last for the lifetime of your deal with the lender. The longer you stay with the lender and the bigger your business becomes, the more the broker earns. If you decide to switch lenders and go back to your broker to find a new deal, you can be fairly sure that they’ll be on a similar arrangement with your new lender.
Are the broker’s referral fees reasonable?
To be clear, there’s no negative agenda here. We don’t have any issues about how brokers are paid. We regularly deal with brokers who provide an excellent service to their recruitment clients and it’s fair to say that most recruiters would prefer for the lender to pick up the bill rather than have to pay for the brokerage service directly. Whether or not the service fee would be cheaper if the lender wasn’t paying referral fees to the broker, year in year out, is perhaps a different question.
Does the broker need to declare the referral fee to the recruiter?
The Court of Appeal considered the mis-selling of car finance to consumers in Johnson v FirstRand Bank Ltd, Wrench v FirstRand Bank Ltd and Hopcroft v Close Brothers (2024), after which there was significant industry chatter around the requirement to disclose commission and referral fees in relation to all finance products, not just consumer car finance. It’s fair to say that the initial concern within the market has now subsided, and the Court of Appeal’s decision is now being interpreted as applying to B2C finance products only. At some point in the future, it’s quite possible that the same issue will be considered in respect of B2B finance, at which point everything could change.
At it stands, there is no strict requirement for the broker to disclose the level of referral fee to their customer. That said, many lenders’ referral agreements specifically require the broker to disclose the referral fee to their customers as a matter of good business practice. It’s always worth checking the small print.
