Table of Contents
- What Is a Business Loan Broker?
- Benefits and Downsides of Working with a Commercial Loan Broker
- Questions to Ask a Small Business Loan Broker
- Business Loan Broker Fees
- How to Spot Red Flags Among Business Loan Brokers
If you’re a small business owner who’s new to the funding process, working with a business loan broker may seem like a smart choice. However, the decision to work with a broker isn’t so cut and dry.
In this guide, we’ll review everything you need to know about hiring a business loan broker, including what they are, how commercial loan brokers work for and benefit you, the costs of working with one, potential red flags and how to make sure they have your best interest at heart.
What Is a Business Loan Broker?
Brokers are a third-party representative of the applicant, acting as the middleman between the owner(s) and any lenders they’re negotiating with. Simply put, business loan brokers help companies like yours obtain commercial loans.
They can work on an owner’s behalf with banks, credit unions, alternative financing companies and peer-to-peer loan platforms. Business loan brokers are independent in the sense that a lender or bank does not employ them.
Why You Should Hire an Experienced Commercial Loan Broker
While the process of getting a business loan may not be as daunting as some would lead you to believe, having the support of an experienced business loan broker when you’re seeking financing can be beneficial.
If you’re a first-time applicant, applying for a business loan can come with a lot of questions. Additionally, there are pros and cons to consider, such as a commercial loan broker’s experience and knowledge on the positive side and business loan broker fees on the negative.
Benefits and Downsides of Working with a Commercial Loan Broker
Let’s look at 3 of the greatest benefits gained by working with commercial loan brokers:
- Business loan brokers can negotiate on your behalf.
- Small business loan 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. Additionally, commercial loan brokers often have industry contacts.
Of course, while there are advantages, we need to acknowledge some of the potential downsides of working with business 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 commercial loan broker, there’s no guarantee that your business will secure a loan with better rates than you could have secured independently.
- Business loan brokers could lean too heavily on lender relationships, steering you into an agreement that’s not the best offer available.
Before deciding whether or not to work with a business loan broker, it’s in your best interest to weigh the good against the (potentially) bad.
How to Evaluate a Business Loan Broker
While we’ve established a few of the advantages and disadvantages of working with a commercial loan broker, there are still other essential elements you need to keep in mind, starting with how to evaluate an agent. Let’s look at a couple of these.
Assess Business Loan Broker Market Knowledge
Once you’ve calculated both the funding amount and type of loan you’re seeking, finding the best business 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 knows the best types of loans you should apply for. For instance, whether you’re interested in a loan secured by collateral or an unsecured business loan, a broker can guide you in the right direction. They’ll know what the application should include and which lenders could potentially be the best fit.
Choose a Business Loan Broker You Trust
It’s crucial that you trust your commercial loan broker. You’re a prospective client who will ultimately be responsible for paying back the loan. It’s the duty of the business loan broker to prove to you that they can help you secure the best rates and terms possible.
Questions to Ask a Small Business Loan Broker
Here are 5 questions to ask a potential small business loan broker:
1. Do you make more money by working with specific lenders over others?
Whenever you consider working with a business loan broker, it’s important to understand their relationship with specific lenders. You want to know that, regardless of the commissions they stand to make on a given offer, they’ll pursue the deal that benefits you.
2. 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 is reluctant to wait a few days, this could be a cause for concern.
3. Will you sell my information to any third parties?
There’s a lot of opportunity in the data you provide to your small business loan broker. You want to know that you can trust them. A business loan broker should always be upfront about what they do with a client’s personal information. If you suspect that a commercial loan broker sells information to third parties, this is not a broker you want to work with.
4. What are your business loan broker fees?
A legitimate business loan broker should be upfront about their fees before you reach an agreement on any offers. If a business loan broker is not upfront about their fees, then they’re probably not a broker you should consider working with.
5. How many lenders will see my application?
The small business loan broker should be prepared to submit the application to multiple lenders. Multiple lenders mean more variety and more chances at discovering the best loan for your business. In the loan pre-approval stage, make sure business loan brokers only perform a soft inquiry (or “soft pull”) on your credit. In contrast to hard inquiries, soft pulls do not appear on your credit report, so they don’t affect your credit score.
Business Loan Broker Fees
Business loan broker fees can range from 1%-3% of the total loan amount on the low end to percentages in the teens on the high end. The amount each broker charges for their services varies based on expertise, size of the brokerage firm, borrower requirements and region.
Typically, there are 3 ways a broker will charge for their services:
1. Requiring that you pay upfront
2. Adding their fees into your lender agreement
3. Billing you after you’ve closed on a loan
Some business loan brokers will charge you just to work with them.
With the notable exception of SBA loans, there isn’t much regulation dictating how much business loan brokers can charge. Therefore, establishing a budget for working with a commercial loan broker is just as important as determining a loan amount. Having a number in mind can help you narrow down the field of potential loan broker candidates.
How to Spot Red Flags Among Business Loan Brokers
As you research business loan brokers, look for these red flags:
- Guarantees of getting a loan
There’s no guarantee that an application will be approved. No legitimate business loan broker will make this promise.
- No client references or reviews
A lack of reviews or testimonials is a major red flag. A legitimate commercial loan broker should be able to provide reviews or contact information for former clients willing to provide a testimonial.
- No contact information online
Legitimate small business loan brokers will provide multiple avenues for clients to contact them. If it seems impossible to reach your commercial loan broker, they may have promised something too good to be true.
- No credit check required
All legitimate commercial loan brokers must check their client’s credit score to find legitimate business loans and lenders.
A legitimate small business finance broker should be transparent about what they do with the client information they have access to.
Legitimate business loan brokers will be transparent with you throughout the entire process, from initial discussion about your commercial loan broker fee agreement to the final lender agreement.
Keeping the Borrower’s Best Interest in Mind
It’s important that the business loan broker you choose can help you while having your best interest at heart. If you don’t have the time to investigate funding options on your own, feel out of your depth or are having trouble finding a lender, a business loan broker can be a huge asset.