What is a referral fee?

A finder's fee or referral fee is a commission paid to the person or entity that facilitated a deal by linking up a potential customer with an opportunity. A finder's fee is a reward and an incentive to motivate the facilitator of the transaction to keep providing referrals to the buyer or seller in the deal.

investopedia.com - What Is a Finder's Fee? Definition, Standard Fees, and Example

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What Is a Finder's Fee?

A finder's fee (also known as "referral income" or "referral fee") is a commission paid to an intermediary or the facilitator of a transaction. The finder's fee is rewarded because the intermediary discovered the deal and brought it to the attention of interested parties. The presumption is that without the intermediary, the parties never would have found the deal, and the facilitator thus warrants compensation. Depending on the circumstance in which the deal is established or completed, the finder's fee can be paid by either the transaction's buyer or seller. Key Takeaways A finder's fee or referral fee is a commission paid to the person or entity that facilitated a deal by linking up a potential customer with an opportunity. A finder's fee is a reward and an incentive to motivate the facilitator of the transaction to keep providing referrals to the buyer or seller in the deal. The terms of a finder's fee can vary from deal to deal, with a payout usually representing a percentage of the completed sale; in some cases, the "fee" is just an informal gift.

Understanding a Finder's Fee

A finder's fee is a reward and thus a form of incentive to keep business contacts and resources communicating the needs of a company or organization to potential clientele or partners. While contracts are not required in such arrangements, structuring and agreeing to terms for finder’s fees can keep all parties in agreement on the scope of compensation that will be paid. This may be especially useful for contacts who repeatedly attract business to the company. The terms of finder’s fees can vary greatly, with some citing 5% to 35% of the total value of the deal being used as a benchmark. It's a staple of Fundera's business model. In many cases, the finder's fee may simply be a gift from one party to another, as no legal obligation to pay a commission exists. A finder's fee is thus different from a service charge, which is a mandatory fee paid to a person or business in exchange for completing a service. A finder's fee is paid to an intermediary of a transaction, as an acknowledgment of the intermediary having sourced the deal and brought it to an interested party.

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Examples of Finder’s Fees

Finder’s fees may be used to reward business contacts, who refer new clients or bring in new sales, to a company. For instance, if a contact arranges a meeting between the buyer and seller of a business, they might receive a finder’s fee for arranging the deal. This can also apply to businesses that seek and gain investors through referrals from others. There can also be a finder's fee included in deals where a company buys select assets or materials from another company. For example, perhaps a rental car company needed more sedans to add to its fleet; a finder’s fee could be paid to the person who arranges the purchase of used sedans from a competitor or from a business that no longer needs those vehicles. As another example, if a movie production company was in the market to acquire more cameras, lights, and other equipment, there might be a finder’s fee for the person or company that connected the company with a seller. Finder’s fees could also be offered for securing freelance professionals or contractors to complete a project. Or consider the types of transactions that can occur with real estate. One individual could be looking to sell a property, but not have any buyers in mind until a friend discovers a potential buyer. If the transaction goes through, and the potential buyer ends up purchasing the property, the seller might give the friend a small percentage of the sale, as a reward for finding the purchaser. Similarly, real estate agents are allowed to give referral fees to other licensed professionals.

investopedia.com - What Is a Finder's Fee? Definition, Standard Fees, and Example

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