When it comes to applying for a small business loan, there is a lot to consider—specifically in regards to the type, term, amount and the company you should work with. One thing that isn’t part of every business loan conversation, however, is whether or not you should work with a business loan broker.
Small business owners who aren’t experienced with business financing may be tempted to work with a broker, assuming they’ll gain more leverage over a lender.
Although this may sound like a great idea for a business owner who’s uninterested in negotiating their own loan terms, working with a business loan broker isn’t as cut and dry as it may seem.
As with most forms of financing, there are pros and cons to consider, including the costs of working with a commercial loan broker and the broker’s experience and knowledge.
It’s best to consider all angles beforehand.
In the next few sections, we’ll review the business broker definition, how commercial loan brokers work for and benefit you, the costs of working with a broker, potential red flags and how to make sure a broker has your best interest in mind.
What Is a Business Loan Broker?
Simply put, business loan brokers help small businesses obtain loans. Brokers are a third party representative of the applicant acting as the middleman between the owner(s) and any lenders they’re negotiating with.
They can work on an owners behalf with banks, credit unions, alternative financing companies and peer-to-peer (P2P) lending platforms. Brokers are independent, in the sense that they are not employed by a lender or bank.
What Can a Business Loan Broker Do for You?
Business loan brokers do more than simply negotiate. Aside from finding the best loan for your business, commercial brokers provide additional benefits, including an assessment of your loan requirements, breaking down each of your potential financing options, sharing their outlook on prospective lenders (and their reputations) and assisting you with any required paperwork, applications or document submissions.
How Working With a Commercial Loan Broker Benefits the Borrower
As with any service, there are pros and cons to working with a commercial loan broker. Before deciding whether or not to work with one, it’s in your best interest to weigh the good against the (potentially) bad.
Let’s first look at 3 of the greatest benefits gained by working with loan brokers:
- Loan brokers can negotiate on your behalf.
- Brokers save business owners time and effort that would otherwise be spent researching, applying and conferring with lenders.
- Typically, commercial loan brokers have more experience in this specific area than the borrower.
Loan brokers often have contacts around the industry. Of course, while there are advantages, we need to acknowledge some of the potential cons of working with loan brokers:
- Borrowers might not have room in their budget depending on the size of the loan they seek and the type of small business they run.
- Even if you work with a loan broker, there’s no guarantee that your business will secure a loan with better rates than what you could have secured independently.
- Loan brokers could lean too heavily on lender relationships, steering you into an agreement that was not the best offer available.
While we established a few of the advantages and disadvantages of working with a loan broker, there are still other essential elements you need to keep in mind, starting with how to evaluate an agent.
Loan Broker Market Knowledge
Once you’ve calculated both the funding amount and type of funding you’re seeking, finding the best loan brokers involves establishing which candidates have the most market knowledge and experience.
A loan broker who can prove their familiarity with the type of business you operate is likely to be the best match. Their familiarity means the loan broker has knowledge of the best types of loans you should apply for, what the application should include and which lenders could potentially be the best fit.
Additionally, any financial market can experience volatility. Because of this, a good commercial loan broker needs to have solid knowledge of the market and how it shifts and changes over time. This understanding allows the loan broker to advise their clients appropriately through any change.
Rapport With the Loan Broker
Once you’ve settled on your short-list of small business loan brokers, it is important to meet with them in person. Interacting with a loan broker face to face or over the phone gives you a better idea of how they treat their clients. Meeting with them can also give you a chance to verify their research and ask additional questions.
If you don’t agree with some of the broker’s answers or opinions once you’re together, it’s best if you share your unease with the broker so they can either address it or you don’t waste your time.
Either way, it’s crucial that you trust your broker. You’re a prospective client who will ultimately be responsible for paying back the loan. It’s the duty of the loan broker to prove to you that they can help you secure the best rates and terms possible while still sticking to realistic goals.
Questions to Ask Your Potential Broker
During your meetings with potential brokers, it’s important to do more than just assess their client service offerings and your general level of comfort.
Once you’ve reviewed your business’s goals and desired outcome with a potential loan, you need to ask about their privacy policies, which lenders the loan broker typically contacts and why, how quickly their process takes and what they charge (we’ll explore business loan broker costs more in-depth in the next section).
As an example, here are three questions to consider when you meet with a potential small business loan broker:
How many lenders will see my application?
The loan broker should be prepared to submit the application to multiple lenders. Multiple lenders mean more variety and more chances at discovering the best fit for your business.
How much time will I have to make a decision?
Ideally, you should have a window of a few days before you’re required to make a decision. If the broker seems to be reticent to waiting a few days, this could be a cause for concern.
A loan broker should always be upfront about what they do with a client’s personal information. If you suspect that a loan broker sells information to third parties, this is not a broker you want to work with.
Business Loan Broker Costs
A legitimate broker should be upfront about fees before reaching an agreement on any offers. If a broker is not upfront about their fees, then they are probably not a broker you should consider working with.
The amount each broker charges for their services varies based on expertise, size of the brokerage firm, borrower requirements and region. Typically, there are three ways a broker will charge for their services:
- Requiring that you pay upfront
- Taking their fees into your lender agreement
- Simply billing you after you’ve come to terms on a loan
Many business loan brokers will charge you just for utilizing their services, even if you do not come to terms with a lender during your relationship.
With the notable exception of SBA loans, there isn’t much regulation dictating how much business loan brokers can charge. Therefore, it’s important to have a transparent discussion with your broker about what they typically charge their clients.
Establishing a budget for working with a broker is just as important as determining the amount you’re seeking in a loan. Having a number in mind can help narrow down the field of potential loan brokers you’ve met with, which in turn helps your loan broker when they seek out funding providers.
Potential Red Flags
One of the most important things to look out for when deciding on a loan broker is whether they are legitimate. Legitimate brokers will be transparent with you throughout the entire process, from initial discussion to the final agreement.
However, there are several red flags you should be watching out for as you do your research:
Guarantees of getting a loan
As with any loan, there is no guarantee the application will be approved. No legitimate broker should be able to make this guarantee.
No client references or reviews
A lack of reviews or testimonials is a major red flag. A legitimate loan broker should be able to provide reviews or contact information for former clients willing to provide a testimonial.
No contact information online
Legitimate loan brokers will provide multiple avenues for clients to contact them. If it seems impossible to reach your broker, they may have promised something that was too good to be true.
No credit check required
All legitimate loan brokers must check their client’s credit score in order to find legitimate business loans and lenders.
A legitimate broker should be transparent about what they do with the client information they have access to.
Keeping the Borrower’s Best Interest in Mind
As with any important financial decision, there are a number of things to consider when looking for a small business loan and exploring what a business loan broker can provide is just one of those considerations.
If you don’t have the time to investigate funding options on your own, feel completely out of your depth or are having trouble finding a lender, a loan broker can be a huge asset. However, it’s important to do thorough research on potential loan brokers to ensure that they can help and that they have your best interest in mind.