A fair broker engagement letter says five things clearly: what the broker will do, how much you will pay and who else pays them, exactly when the fee is earned, how long the arrangement lasts and how either side ends it, and what happens to your information. Everything else is detail. Read it before you send documents, because the letter sets the terms of the whole relationship.
Many brokers are paid entirely by the lender and use only a short authorisation form. Others charge a fee or ask for exclusivity, and then a proper letter matters. Professional brokers welcome edits; a clear letter prevents the disputes nobody wants.
The clauses, in order
| Clause | What fair looks like | What to strike or rewrite |
|---|---|---|
| Parties | Your legal business name and the brokerage's legal name, with its registration number where the state requires one | A trade name only, with no legal entity |
| Scope | The product and amount you want, for example a $250,000 equipment loan | "Any and all financing" with no limit |
| Services | Package the file, submit to suitable lenders, present every offer as written, help negotiate | Vague "consulting" that justifies a fee without a loan |
| Compensation | A dollar amount or percentage, who pays it, and any lender paid commission | Silence on lender paid compensation |
| Fee trigger | Earned only when a loan funds on terms you accepted in writing | Earned on application, approval or any offer |
| Upfront costs | None, or named third party costs at actual cost | "Processing" or "underwriting" deposits |
| Exclusivity | None, or a short period for a defined product | Open ended or auto renewing exclusivity |
| Tail | A short period, covering only lenders the broker introduced and named | Any financing from any source for a year or more |
| Term and termination | A fixed term, ended by either side in writing | Termination only by the broker |
| Confidentiality | Your file goes only to named lenders you approve | Rights to share or sell your information |
| Disputes | Plain process, your home state | Distant venue, one sided fee shifting |
Compensation: put every dollar in one place
The letter should state the broker's total compensation from every source. Ask for three lines:
- Fee paid by you, in dollars or as a percentage of the funded amount.
- Commission paid by the lender, or "to be disclosed in the lender's offer."
- Whether the lender's payment to the broker is built into your rate or factor rate.
The law is moving in this direction. Virginia requires sales-based financing providers to disclose "whether the provider will pay compensation directly to a broker" and the amount. Texas HB 700 requires providers to disclose the terms of offers under $1 million, and the recipient signs those disclosures before the application is finalised. When the letter and the disclosure match, you know the full price.
On a $250,000 equipment loan, a 2% fee is $5,000. Write the dollar figure into the letter, not just the percentage.
The fee trigger is the clause that matters most
The question that decides almost every fee conversation is simple: when is the fee earned? Fair wording ties it to funding:
"The fee is earned only when a loan, lease or advance funds from a lender introduced by the broker, on terms the client has accepted in writing, and is payable from the proceeds at closing."
Strike any version that makes the fee due on:
- Submission of an application
- A lender's approval or term sheet
- An offer you decline
- Financing you arrange yourself with your own bank
No fees before an offer
Florida bars brokers from collecting an advance fee for brokering services other than bona fide costs, according to Mayer Brown. That is a sound standard in every state. If the letter lists any upfront cost, it should name the third party, such as an appraiser or equipment inspector, and say the cost is passed through at actual cost.
SBA deals have their own rules
If you pay a broker or packager on an SBA 7(a) loan, the compensation goes on SBA Form 159, signed by you, the agent and the lender. The form states that compensation "must bear a necessary and reasonable relationship to the services actually performed," that "compensation cannot be contingent on loan approval," and that amounts over $2,500 must be itemised. It also states that the lender "cannot charge an Applicant any commitment, bonus, broker, commission, referral or similar fee."
So an SBA engagement letter should describe the packaging work, give an hourly rate or itemised fee, and match Form 159 line for line. A percentage success fee written for a conventional loan does not fit an SBA deal.
Exclusivity and the tail
Exclusivity is fair in a few cases: an SBA loan where the broker packages a full file, a complex asset based deal, or a commercial real estate loan where two brokers shopping the same property confuse lenders. In those cases, keep it short and defined. Thirty to sixty days for a stated product is a reasonable ask to put forward; anything open ended is not.
A tail clause says the broker still earns a fee if you close with a lender they introduced after the letter ends. That is fair, because the broker did the work. Limit it to lenders the broker names to you in writing, and to a short period. Strike any tail that covers lenders you found yourself. Our guide to broker exclusivity agreements goes deeper.
Confidentiality: name where your file goes
Your file holds tax returns, bank statements and personal financial information. The letter should say:
- The broker sends your file only to lenders you have approved, by name or by list.
- The broker does not sell, rent or share your information with other brokers or lead buyers.
- The broker deletes or returns your documents on request when the engagement ends.
A broker who resists this clause is telling you something about how your file will be handled.
Registration, where it applies
In Virginia, brokers must register with the State Corporation Commission. Texas requires commercial sales-based financing brokers to register with the Office of Consumer Credit Commissioner, and HB 700 sets a civil penalty of $10,000 per violation. Ask the broker to state their registration in the letter if your state requires one, then check it against their standing on the register.
A one page model
Engagement letter
Client: [Legal business name], [state]. Broker: [Legal brokerage name], [registration number, if required].
Purpose: Arrange [product] of approximately [$ amount] for [use of funds].
Services: Prepare the file, submit to suitable lenders approved by the client, present every offer as the lender wrote it, and help negotiate terms.
Compensation: [$ amount or %] of the funded amount, paid by the client from proceeds at closing. Any compensation the broker receives from the lender will be disclosed in writing before the client signs.
Fee trigger: Earned only when financing funds from a lender introduced by the broker, on terms the client has accepted in writing. No fee is due if the client declines an offer.
Upfront costs: None, other than named third party costs approved in writing and charged at actual cost.
Term: [60] days. Either party may end this letter by email. Exclusivity: [none / for (product) only, for (30) days].
Tail: [90] days after termination, for lenders the broker introduced and named to the client in writing.
Confidentiality: The client's information goes only to lenders the client approves. It is not sold or shared with any other party, and is returned or deleted on request.
Signed: [Client] [Broker] [Date]
Bracketed figures are yours to set. Bring this model to the first call and ask the broker to mark up their own letter against it.
Before you sign
Read the letter against the table above, ask for changes by email, and keep the signed copy with your loan documents. Brokers on the register carry a register number, a status and a last checked date, and verified entries show fees in writing, which makes the compensation clause easy to confirm.
Questions owners ask
Do I need an engagement letter with a business loan broker?
If you pay the broker anything directly, or the broker asks for exclusivity, yes. A one page letter that sets the fee, the trigger, the term and confidentiality protects both sides.
When should a broker's fee be earned?
When a loan funds from a lender the broker introduced, on terms you accepted in writing. Not on application, not on approval, and not if you decline an offer.
Is a tail clause fair?
A short tail, limited to lenders the broker actually introduced and named in writing, is fair. A long tail covering any financing from any source is not.