Expert opinion

4 Reasons Why SMEs May Not Be Getting Truly Independent Advice From Their Brokers

Alexei Garan, Partner - Business Funding at Shaw & Co, explains why SMEs may not be getting truly independent advice from their brokers when trying to secure growth funding...

3 minutes
July 9, 2024
Words:
Alexei Garan
Images:
Cottonbro from Pexels & Tim Gander Photography
PDF:
Report

For SMEs there are a bewildering number of funding options out there. As well as the traditional lenders, there is a burgeoning alternative lending market offering cashflow lending, growth funding, leveraged MBO and acquisition financing debt products that range massively in cost of interest, tenor, principal repayment structures, debt servicing, fees, personal guarantees and equity/warrant requirements, not to mention a range of many other features.  

Of course, we’re not suggesting that brokers are anything other than honest. The point is that the brokerage process rarely provides SMEs with the widest possible view of all the available funding options. Here’s four reasons why:

1 - A Broker Is Just That

By the very nature of their business model, brokers are incentivised to fulfil a funding requirement with the minimum number of lender approaches and, ultimately, the minimum number of lenders. Not only does this enable them to move swiftly on to their next client, and therefore their next sale, it also greatly reduces the complexity of a deal.

2 - Follow the Commission  

As brokers are typically remunerated through lender commissions, it is impossible for a SME to know whether the deal on the table is actually the best one available, or simply one from a lender that a broker has a commission arrangement with. Subsequently, a broker is also incentivised to convince the client that the terms on offer are attractive and to argue that any unappealing lender terms, such as ‘Personal Guarantees’ or ‘Equity Dilution’, are completely bearable or even ‘market standard’.  

Alexei Garan – Head of Business Funding at Shaw & Co
Alexei Garan – Head of Business Funding at Shaw & Co

3 - Haste Leads to Waste

In the vast majority of cases, brokers are operating in competition with other brokers and often a SME’s own efforts to source funding. This means that brokers are incentivised to obtain a set of terms and represent it to the client as soon as possible, to have a chance of the client accepting the deal and to ‘own’ a lender connection for that specific client requirement. Obviously, this doesn’t incentivise brokers to prepare a client properly for the market or maximise the number of options they source so the client can have little confidence that they are seeing the whole market and truly picking the best deal. Moreover, lenders in this context can only gain a limited understanding of a business and are incentivised to make cautious offers, if any. Any opportunities not taken up quickly are discarded as the broker moves on to the next one.

4 - Timing

In contrast to a coherent process where all relevant lenders are working to the same timeline, a brokered process can often stretch. This is because lenders are asked to show terms as soon as possible to avoid being beaten by someone else. As a result, clients usually receive a series of unattractive or inadequate offers from lenders who are not incentivised to ‘put their best foot forward’. We often see cashflow pressures becoming quite acute in these types of processes, forcing businesses to eventually accept terms on a deal that they would otherwise have rejected, with consequences such as significant equity dilution or a much higher cost of borrowing.

If you'd like to discuss how Shaw & Co can help you sell, buy or fund the growth of a business, please book a meeting here

Words:
Alexei Garan
 - 
Partner
Read 
Alexei Garan
's bio

INDUSTRY Content

See all Shaw Reports
The Shaw Report: Leisure, Tourism & Sport - Interim Review #2

Shaw Report

|

June 27, 2023

The Shaw Report: Wholesale & Retail Trade - Annual Report #2

Shaw Report

|

June 27, 2023

The Shaw Report: Property & Construction - Annual Report #2

Shaw Report

|

May 30, 2023

The Shaw Report: Automotive, Transport & Logistics - Interim Review #2

Shaw Report

|

May 24, 2023

The Shaw Report: Manufacturing & Engineering - Interim Review #2

Shaw Report

|

May 10, 2023

The Shaw Report: Food & Drink - Interim Review #2

Shaw Report

|

May 9, 2023

The Shaw Report: Technology, Media & Telecoms - Interim Review #2

Shaw Report

|

April 17, 2023

The Shaw Report: Energy & Natural Resources - Annual Report #2

Shaw Report

|

March 28, 2023

The Shaw Report: Professional Services - Annual Report #2

Shaw Report

|

March 20, 2023

The Shaw Report: Banking, Financial & Insurance Services - Annual Report #2

Shaw Report

|

February 28, 2023

The Shaw Report - Healthcare & Life Sciences Annual Review December 2022

Shaw Report

|

December 14, 2022

The Shaw Report - Wholesale & Retail Trade Industry Interim Review December 2022

Shaw Report

|

December 14, 2022

The Shaw Report - Leisure, Tourism and Sport Annual Review November 2022

Shaw Report

|

November 29, 2022

The Shaw Report - Property & Construction Industry Interim Review November 2022

Shaw Report

|

November 23, 2022

The Shaw Report - Technology Media & Telecoms Industry Annual Review October 2022

Shaw Report

|

October 19, 2022

The Shaw Report - Automotive, Transport & Logistics Industry Annual Review October 2022

Shaw Report

|

October 12, 2022

The Shaw Report - Professional Services Industry Interim Review September 2022

Shaw Report

|

September 26, 2022

The Shaw Report - Manufacturing & Engineering Industry Annual Review September 2022

Shaw Report

|

September 1, 2022

The Shaw Report - Banking, Financial and Insurance Services Industry Interim Review August 2022

Shaw Report

|

August 23, 2022

The Shaw Report - Healthcare & Life Sciences Interim Review August 2022

Shaw Report

|

August 11, 2022

Food & Beverages Industry Report 2022

Shaw Report

|

July 22, 2022

The Shaw Report - Leisure, Tourism & Sport Interim Review July 2022

Shaw Report

|

July 19, 2022

The Shaw Report - Energy & Natural Resources Interim Review June 2022

Shaw Report

|

June 27, 2022

Shaw & Co launches annual analysis of wholesale & retail trade industry

Shaw Report

|

June 29, 2022

The Shaw Report - Automotive, Transport & Logistics Interim Review May 2022

Shaw Report

|

May 19, 2022

Shaw & Co Launches Annual Analysis of Property and Construction Industry

Shaw Report

|

May 6, 2022

The Shaw Report - TMT Interim Review May 2022

Shaw Report

|

May 5, 2022

The Shaw Report - Manufacturing & Engineering Interim Review April 2022

Shaw Report

|

April 8, 2022

The Shaw Report - Food & Drink Interim Review March 2022

Shaw Report

|

March 25, 2022

The Shaw Report - Professional Services Annual Review 2022

Shaw Report

|

March 17, 2022

The Shaw Report - Leisure, Tourism & Sport December 2021

Shaw Report

|

December 14, 2021

The Shaw Report - Health & Life Sciences December 2021

Shaw Report

|

December 10, 2021

The Shaw Report - Banking, Financial & Insurance Services December 2021

Shaw Report

|

December 8, 2021

The Shaw Report - Energy & Natural Resources November 2021

Shaw Report

|

November 16, 2021

The Shaw Report - Technology, Media & Telecoms October 2021

Shaw Report

|

October 28, 2021

The Shaw Report - Automotive, Transport & Logistics October 2021

Shaw Report

|

October 14, 2021

The Shaw Report - Manufacturing & Engineering October 2021

Shaw Report

|

October 1, 2021

The Shaw Report - Food & Drink September 2021

Shaw Report

|

September 27, 2021