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. 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?
Business loan brokers help companies like yours obtain commercial loans. Brokers are a third-party representative of the applicant, 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.
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. 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 the loan broker’s experience and knowledge on the positive side and the commercial 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 small business loan brokers:
They can negotiate on your behalf.
They save business owners time and effort that would otherwise be spent researching, applying and conferring with lenders.
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.
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.
There’s no guarantee that your business will secure a loan with better rates than you could have gotten on your own.
Loan brokers could lean too heavily on established lender relationships, steering you into an agreement that’s not the best offer available.
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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.
Assess Business Loan Broker Market Knowledge
Once you’ve calculated both 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 familiarity 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 potentially be the best fit.
Choose a Business Loan Broker You Trust
It’s crucial that you 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.
Questions to Ask Small Business Loan Brokers
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 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 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. 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.
4. What are your commercial loan broker fees?
A legitimate business loan broker should be upfront about their fees before you reach an agreement on any offers. If they’re not transparent about fees, look elsewhere.
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 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.
Commercial loan broker fees can range from 1%- 6% 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:
Requiring that you pay upfront
Adding their 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 lack of reviews or testimonials is a major red flag. A small business finance broker should be able to provide reviews or contact information for former clients willing to provide 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.