Commission Advance for Brokers
How does a commission advance work?
Some people confuse a real estate commission advance with a loan. But, unlike a loan, a commission advance isn’t an agreement to borrow money; instead, it’s an agreement where a real estate agent sells a portion of their commission to a company before the closing date.
When a broker or agent wants early access to their pending commissions, they’ll apply for an advance. After evaluating the applicant and the transaction, the advance company will make an offer to advance a portion of the pending commission to the broker or agent. If the broker agrees, the advance company will send the money (usually within one business day). At closing, the money the advance company paid the agent is sent directly back to the advance company, along with any applicable fees.
Who’s eligible for a commission advance?
Any licensed real estate agent with a pending commission (and sometimes even an active listing) may be eligible for a commission advance. Since brokers may have their own deals, brokers may want to take a commission advance from time to time, too. In either case, the broker will have to sign off on the advance, whether it’s for themselves or for one of the agents working at their brokerage.
How much does a real estate commission advance cost?
The cost of a real estate commission advance can vary based on the company, the advance amount, the closing date and the agent requesting the advance. Though a commission advance isn’t a loan product, the advance company still wants assurances that the broker will repay them promptly. If the advance company sees that as a higher risk, or if they have to advance more money for a longer period of time, the fees for the advance will be higher. Generally, the cost of a commission advance ranges from as low as 5% to 16% or more.
Why would brokers need a commission advance?
Like all business owners and agents, brokers have expenses. When you work on commission and don’t earn a set salary, your income can vary. As a result, you may want early access to commissions to stabilize cash flows and cover business or personal expenses. Brokers often have the same expenses as agents and may have additional expenses like an office lease, payroll, technology and more. Since brokers are more like business owners than self-employed individuals, their expenses can be inflexible, leaving them with few options outside of a commission advance.
How to choose a commission advance company
Though most commission advance companies offer a similar service, the application review, fee schedule and turnaround times may be different. While some commission advance companies can finalize an advance and wire the money to you in a few hours, others may take up to 48 hours to process an advance.
If you’re looking for a commission advance, another important consideration is the company’s fee schedule and the grace period (if they have one). An advance offers brokers and agents the convenience they need to stabilize their cash flows, but no one likes overpaying. As a result, many brokers and agents will shop around to get the lowest pricing and the most favorable terms on their advance.
Conclusion
Despite providing a valuable service to brokers and agents, even the lowest-priced commission advance companies can charge upwards of 5% for a deal closing in less than 30 days. That’s why Tongo created a better solution to commission advance, offering agents a business line of credit they can use any time. Besides offering the convenience of a commission advance, Tongo’s fees are even lower, starting at just 3% for 30 days, and you only have to repay what you spend.