A quick Google search for a business loan broker might turn up thousands of results for people and services.
From regular expenses like payroll and rent to surprise costs like inspection fees, permits and major equipment purchases, running a business can become very expensive.
A small business loan is for businesses that are already established and need capital for major expenditures, growth, or covering operating costs.
There are a variety of ways to attain one of these loans, but today, we’re going to look at working with small business loan brokers.
What Can a Business Loan Broker Do for You?
As a business owner, you may have already worked with other kinds of brokers, such as real estate brokers, and maybe even insurance brokers.
Small business loan brokers serve as an intermediary between business owners and the lenders that provide financing.
For a fee (usually a percentage of the total loan, or a flat rate), small business loan brokers will develop an understanding of your business (length of time in business, revenue, etc.) and connect you with a potential lender who may offer fast business loans.
Business Loan Broker Costs
The amount (and way) that small business loan brokers charge for their services varies greatly.
With some, you will make your loan payments to the broker directly, and they will tack on their fees to the loan payments you make.
Others will require up front payment in order to secure their services.
Many will charge you just for utilizing their services, but if you do your research you’ll find some that don’t charge unless they are able to successfully connect you with a lender.
Going through the process of securing a small business loan by yourself can be an incredibly time-consuming and frustrating process, which is why there are so many small business loan brokers.
They can be an invaluable service when you need to quickly secure working capital to continue running your business, but sometimes they can be more trouble than they’re worth.
This article will help you navigate this sometimes confusing market to get the help you need and make the most of it.
Small Business Loan Broker – Why Hire One?
Given how complicated the process of securing a small business loan can be, the primary reason to hire a small business loan broker is that it’s easier to get one (and faster) than trying to do everything on your own.
However, there are some strategic advantages to working with a small business loan broker as well—at least the first time you’re in the market for one.
A small business loan broker can help you explore options.
The days of banks being the only way to secure a loan are long gone.
The market for capital is larger than ever, which unfortunately makes it more confusing—especially in the hunt for the best deal.
Good small business loan brokers may be able to connect you to a lender you might not be able to find on your own.
A business loan broker could help your rate.
Small business loan brokers have a whole network of lenders they can distribute your application to, each with different business credit score requirements, standard rates, and fee structures.
Being able to see how different lenders operate gives you a more solid understanding of the entire market.
A small business loan broker will have industry connections.
Small business loan brokers live and breathe the small business loan market, so naturally, they can develop strong working relationships with a wide array of lenders.
If you work with the right broker, they might be able to find a deal on a small business loan that you may not find yourself.
A business loan broker can deliver guidance.
If you try to secure a small business loan on your own, inevitably you will come across loan terms you can’t interpret and questions that you can’t simply Google the answer to.
A good small business loan broker will be able to explain all the complicated verbiage that’s part of your loan offer.
What To Look For in a Business Loan Broker
Through word of mouth and solid recommendations, you might be lucky enough to find a good, trustworthy small business loan broker right off the bat.
However, expect to spend a solid amount of time finding one that’s the right fit for you and that you’re comfortable working with.
Choosing a Business Loan Broker
“A good small business loan broker will be very knowledgeable about how a business can raise capital. They’ll be well connected to lenders and knowledgeable about all of the various lending products out there,” says Ian Atkins, an Analyst / Staff Writer for FitSmallBusiness.com.
“He or she should be able to hear not only what you say, ‘I need X dollars for this reason,’ but also what you don’t say ‘I need X dollars for this reason because I have slow paying clients.
A good small business loan broker should be able to explain solutions and financing options in plain English (not jargon), and walk you through the actual cost of any potential financing. They will also be an effective advocate when dealing with the lender—not over selling, but making sure you’re seen in the best light and getting a good deal.”
Unfortunately, small business lending is a notoriously unregulated market, so it is important that you take some steps to protect yourself.
In some cases, business loan brokers may be more likely to look out for the interests of lenders than they do for the interests of small business owners.
These are some questions you should be prepared to ask a small business loan broker (and the answers you should expect) before you decide to start working with them.
Ask Your Business Loan Broker: What is the total cost of my loan?
In many industries, attorneys, agents, managers, and brokers have a cap on how much they can make from a particular deal (as well as how it’s paid) in order to prevent clients from being taken advantage of.
Unfortunately, small business loan brokers don’t have a cap in place, so taking advantage of a borrower would not only be easy, but completely legal.
In this industry, lenders are used to paying small business loan brokers fees just for making introductions to borrowers, ranging from 7 – 17%.
In some cases, that fee will be passed on to borrowers instead of the lender.
To protect yourself, always ask your loan broker first what the total cost of the loan is (including the interest rate and APR), as well as what additional costs and fees your broker is working into the loan.
It’s imperative to know exactly how much you’re actually paying for a loan.
Also keep in mind that small business loan brokers that work directly with community banks and credit unions may have the lowest fees.
Ask Your Business Loan Broker: How many lenders are you shopping my loan to?
Part of the process for securing a small business loan is a period where your broker will collect information about your company (such as its assets and liabilities—basically a risk profile), and include that information in the loan application package.
This package might be shopped around to all the lenders in their network.
If your broker recommends another strategy however, that’s cause for pause.
If they say that they already know the perfect lender for your without even shopping the package around, your interests might not be their number one priority.
Of course, it’s possible that they already do know the lender with the lowest interest rate for you.
But this next question can help you determine if that’s the case.
Ask Your Business Loan Broker: Are there certain lenders that you make more money from working with?
Another aspect of the small business lending market being so unregulated is that broker fees aren’t uniform for all lenders.
You’ll see this play out if your broker brings several loans to you and you notice a reasonable fee tacked on to one with an incredibly large one tacked onto the interest rate of another.
What is the science behind this?
It’s actually really simple: some lenders offer brokers higher fees if they funnel qualified borrowers directly to them instead of their competition.
If this seems like it could create some problems, however, you’re correct.
This is the exact kind of practice that led to the subprime mortgage crisis that nearly brought down the global economy in 2008.
“Ask a small business loan broker how they make their money,” urges Atkins. “Some small business loan brokers will earn a percentage of funding they are able to arrange for you and that you accept. Others will charge a fee upfront to work with you and a percentage of the funding they’re able to help facilitate. Ask about their experience with your specific situation, businesses in your industry, and businesses of your size. Ask them for a reference or two.”
There are no laws in place to prevent brokers and lenders from forging this kind of agreement, so it’s up to borrowers to be on the lookout for this sort of practice.
Ask Your Business Loan Broker: What are the drawbacks of a particular product?
Every loan has some good and bad aspects to it.
For example, a short term loan is great when you need funding right away, but you’re going to be pay a substantially higher interest rate on it than a more long term loan.
A good small business loan broker should be more than willing to help you navigate the piles of documents that are part of any loan agreement and make you aware of its potential pitfalls instead of just promoting its positive aspects.
More importantly, they should be actually knowledgeable about these matters.
“Bad small business loan brokers are typically no better than a Google search,” warns Atkins. “They typically will not offer solutions that you couldn’t have found on your own. Bad small business loan brokers will be more apt to offer one-size-fits-all solutions (no matter what you say your situation is or the desired outcome is, they offer the same financing solution) or shot-gun solutions (trying a lot wide-ranging solutions in the hope that one works).”
If your broker can’t give you good, honest and intelligible answers to your questions, you should be skeptical not only of the loan itself, but of the broker’s intentions and competence.
Ask Your Business Loan Broker: Can I take some time to think about these options?
Time is money, especially when getting paid depends on when (and if) you close a deal.
Unfortunately, this is especially true of small business loan brokers—so don’t be surprised if you feel incredibly rushed to choose a loan once they present the offers to you.
This is a big financial commitment, however, so no borrower should feel pressured to sign on the dotted line without having all the time they need to mull over their decision and feel that it’s the best option.
Even if your small business loan broker is 100% above-board and trustworthy, it’s still in your interest to take some time consulting with trusted friends, family, and fellow entrepreneurs before making a final decision.
If your broker isn’t interested in giving you that kind of no-pressure freedom, they might not be working in your best interests.
Protect Yourself from Predatory Business Loan Brokers
Working with small business loan brokers can be both a safeguard against bad deals and wasted time, as well as protection from exposure to mal-intent.
With that being said, small business loan brokers have very little federal oversight, so it’s up to borrowers to look out for themselves.
The safest route to go is to only work with brokers who abide by the Small Business Borrower Bill of Rights.
What is the Small Business Borrower Bill of Rights?
A group of lenders, brokers, and marketplaces have combined forces to create the Responsible Business Lending Coalition, which has collectively created a body of guidelines to protect borrowers from any predatory lending practices.
The agreement is far-reaching and incredibly impactful.
Here are some of the highlights:
Transparent Pricing Terms
One of the hardest parts of the loan process is determining exactly what the total loan amount is when you factor in things like APR, interest rates and broker fees.
The transparent pricing rules make it so that borrowers are just as in the know about the cost of their loans as the lenders and brokers are.
One of the ways lenders have become infamous for churning out profit is by getting borrowers locked in never-ending cycles of debt and re-borrowing.
The Borrower Bill of Rights has rules in place to guarantee that all loan products can be repaid by borrowers accordingly to their original terms.
Small business loan brokers make their money when they close a deal, so to them, it doesn’t matter if the borrower can even repay the debt.
However, parties that have agreed to the Borrower Bill of Rights will only work in situations where a loan has been underwritten responsibly.
Fair Broker Treatment
Brokers who have agreed to the Borrower Bill of Rights are bound by rules of operating transparently, honestly, and impartially with borrowers.
It is their job to empower borrowers to make the best decision as to what loan they select, not to make a quick buck.
Fair Collection Practices
The Borrower Bill of Rights stipulates that borrowers must be treated fairly and respectfully, even if they are unable to make payments on their loan and have gone into default.
LendGenius is part of the Borrower Bill of Rights Network
If you’re ready to take the next step and find a small business loan broker to work with, feel free to bookmark this article to review red flags and advice on what to ask prospective brokers in the future.
If you’d rather skip that hassle, LendGenius can help connect you to a small business lender. To get started, you just have to fill out a simple online form.
Now that’s genius.