If you’re a small business owner new to the funding process, you might consider working with a business loan broker.
Find out everything you need to know before hiring one. Learn how commercial loan brokers work for and benefit you, the costs involved, potential red flags and how to make sure a business loan broker has your best interest at heart.
What Is a Business Loan Broker?
Business loan brokers help companies like yours obtain commercial loans. Brokers are third-party representatives of applicants, acting as the middleman between the owner(s) and any lenders during negotiations.
They can work on an owner’s behalf with banks, credit unions, alternative financing companies and peer-to-peer loan platforms. Small business loan brokers are independent in the sense that a lender or bank doesn’t employ them.
Related: Bank Loans for Small Business: Weighing the Pros and Cons
Why You Should Hire an Experienced Commercial Loan Broker
While the process of getting a business loan might 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.
Here are a few reasons you might take the opportunity to work with a business loan broker:
- You’ve never applied for a business loan: If you’re a first-time applicant, applying for a business loan can come with many questions. A business loan broker can help you navigate the process.
- You’re a newer business owner: Often, conventional lenders require significant time in business. However, a business loan broker may have lender relationships with providers who accept applicants within just a few months in operation.
- Your credit has seen better days: Business loan brokers may have relationships with subprime lending providers who will accept applicants with credit scores in the 500s. However, these products often come with higher costs.
- You’ve been denied a business loan in the past: Brokers may have relationships with alternative lenders who can provide nontraditional financing products with less stringent qualification criteria.
Pros and Cons of Working with a Commercial Loan Broker
There are pros and cons to consider, such as a business loan broker’s experience and knowledge on the positive side and a commercial business loan broker’s fees on the negative, for example. Here’s a further breakdown of the benefits and downsides.
Let’s look at 3 of the greatest benefits gained by working with small business loan brokers:
- Negotiating skills: They can negotiate on your behalf.
- Time savings: They save business owners time and effort that would otherwise be spent researching, applying and conferring with lenders.
- Experience and contacts: Typically, 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 a small business finance broker.
- Affordability: 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.
- No guarantee: There’s no guarantee that your business will secure a loan with better rates than you could have gotten on your own.
- Bias favoring certain lenders: Loan brokers could lean too heavily on established lender relationships, steering you into an agreement that’s not the best offer available.
How to Evaluate a Business Loan Broker
Apart from the general advantages and disadvantages of working with a small business finance broker, you need to evaluate a potential agent as an individual. Keep the following criteria in mind, whether you’re seeking an SBA loan broker or another small business loan specialist.
Assess Business Loan Broker Market Knowledge
Once you’ve calculated the funding amount and type of loan you’re seeking, you should establish which candidates have the most market knowledge and experience.
A commercial loan broker who can prove their familiarity with the type of business you operate is likely to be the best match. Their understanding means they know 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 business loan broker can guide you in the right direction. They’ll know what the application should include and which lenders could be the best fit.
Choose a Business Loan Broker You Trust
You must trust your commercial loan broker. It’s their duty to prove to you that they can help you secure the best rates and terms possible.
Also, research the business loan broker on popular rating platforms, such as the Better Business Bureau, Trustpilot and Google Reviews. See how they rate, what current and past customers are saying about them and what kind of complaints they’ve received.
Additionally, reach out to fellow business owners you know in your community and see if they have anything to say about the broker.
Questions to Ask Small Business Loan Brokers
Here are 6 questions to ask when trying to find the best business loan broker to work with.
1. Do you make more money by working with specific lenders?
Whenever you consider working with a business finance 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 long does it take to get funding?
This is an especially important question if you require a quick turnaround. For example, conventional and SBA loans take longer than other business financing options. If your small business loan broker doesn’t work with providers of fast business loans, you may want to look elsewhere.
3. 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 commercial loan broker is reluctant to wait, this could be a cause for concern.
4. 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. They should always be upfront about what they do with a client’s personal information. If you suspect that a business finance broker sells information to third parties, you don’t want to work with this person.
5. What are your commercial loan broker fees?
Legitimate business loan brokers should be upfront about their fees before you reach an agreement on any offers. If they’re not transparent about fees, look elsewhere.
Related: Common Loan Fees to Expect When Securing Business Financing
6. How many lenders will see my application?
The small business loan broker should be prepared to apply to multiple lenders. Multiple lenders mean more variety and chances of discovering the best financing options for your business.
In the loan preapproval 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.
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Commercial Loan Broker Fees
Most commercial loan broker fees range from 1%- 6% of the total loan amount, although some may charge percentages into the teens. 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 services:
- Requiring you pay upfront
- Adding fees into your lender agreement
- Billing you after you’ve closed on a loan
With the notable exception of SBA loan brokers, there isn’t much across-the-board regulation dictating how much a business loan broker can charge. Some business loan brokers will charge you just to work with them.
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 candidates.
How to Spot Red Flags Among Business Loan Brokers
As you research small business loan brokers, look for these red flags:
- Guarantees of getting a loan: There’s never a guarantee that your financing application will be approved, and no legitimate business loan broker will make this promise.
- No client references or reviews: A major red flag is a lack of reviews or testimonials. A small business finance broker should be able to provide reviews or contact information for former clients willing to give testimonials.
- No contact information online: You should be able to find multiple avenues for clients to contact a business loan broker. Being unable to reach someone can be a warning sign.
- No credit check required: A commercial loan broker must check a client’s credit score to find legitimate business loans and lenders.