Business Loan Brokers: Do You Need One?
When searching for small business financing, you could hire a business loan broker to shop for funding on your behalf. A broker would act as an intermediary between you and lenders, doing research you don’t have time for and potentially saving you money.
But not all business loan brokers have borrowers’ best interests in mind. Brokers charge fees and commission for their services and may be incentivized to push you toward pricey loans. Before hiring a broker, do your research to avoid falling prey to unsavory practices.
What is a business loan broker?
A business loan broker is an independent agent who shops for business financing on behalf of business owners. A broker acts as a matchmaker, pointing business owners to loan products that could meet their specific funding needs. Their role is to speed up the timeline to funding.
Brokers are intermediaries between business owners and banks, credit unions, alternative, online lenders and peer-to-peer lending platforms. Brokers may be able to apply for favorable rates and terms based on their relationships with lenders.
Brokers generally make money by adding a percentage onto the interest rate of your financing. Broker fees may range depending on loan size and term length, but they can get quite steep.
Do you need a small business loan broker?
It may not always be worthwhile to hire a business loan broker. Instead of searching for your best rates and terms, some brokers could pressure you to take out expensive financing to boost their own bottom line.
If you do your own comparison shopping when applying for a business loan, it may add a little extra time, but you may save more on borrowing costs in the long-term.
Next, we’ll discuss what signs indicate that a business loan broker should be avoided.
Red flags to watch for when choosing a business loan broker
Before hiring a business loan broker, consider these factors to determine whether you’ve found someone reputable or not.
Upfront fees
Fees and payment structure are often what sets a reputable business loan broker apart from a shady one. If a broker charges upfront fees for their service, regardless of whether or not you secure financing, that should raise suspicion.
Brokers normally charge fees for their services, either directly charging you or the lender they’re working with. As mentioned earlier, the fee would likely be a percentage of your total loan amount, though it could be a flat fee instead. Before hiring a broker, understand how much the service would cost, and whether payment is expected before or after you close on a loan.
Expensive financing options
If a broker pushes you toward loans or merchant cash advances with high interest rates, you may want to proceed with caution. A worthwhile broker should give you a range of financing options that you can afford.
Ask about the types of funding that past clients borrowed. This would give you an idea of what you can expect the broker to offer you. They should be willing to break down how many previous clients took out bank loans, online loans or merchant cash advances, as well as the average interest rates for those products.
Minimal amount of time to decide
You should be given a few days to make a decision after your broker presents loan options. If a broker pushes you to make a quick choice, they may be more concerned with the sale than whether you make the right decision for your business.
Being overly aggressive about your decision would be a red flag, as would disinterest in your business altogether. A broker who doesn’t ask many questions about your financing needs may not be interested in providing your best options.
Pros and cons of hiring a broker
Not all business loan brokers have questionable intentions, and you may find that working with a broker makes sense for your business.
Pros
- Speed: A broker, already familiar with the business financing landscape, could likely research lenders and products faster than you could on your own.
- Affordable financing: Brokers could leverage their connections with lenders to secure low-cost funding for your business.
- Access to a suite of products: You may think you’re limited to one funding option, like a traditional term loan, but a broker may find that another type of financing, like an equipment loan or a business line of credit, would better match your needs.
Cons
- Fees: You would need to pay brokers a fee for their service, on top of the debt you take on. Fees may be high, depending on your financing needs.
- Opaque rates: You may need to push a broker to be transparent about the total cost of financing, including the lender’s rates, fees and penalties, especially if they’re promoting an expensive product like a merchant cash advance where repayment amounts may fluctuate.
- No guaranteed approval. Whether or not you qualify for the financing that a broker presents would ultimately be up to the lender or financing company.
How to choose a reputable business loan broker
A good place to begin your search for a business loan broker is with your local Secretary of State — look up your office here — which might require brokers to register or even become licensed before conducting business there. Your local SBA district office might be able to help, too. Follow these tips to find a reputable loan broker at the start.
Research: Doing your due diligence when working with loan brokers is the key to avoiding trouble. Find out as much information as you can, specifically regarding how they are compensated and which types of financing they usually sell. Don’t be afraid to turn down funding if something seems off.
Ask for references: Requesting references could help you determine whether a broker is reputable or not. A legitimate broker should have no trouble providing two or three references from businesses. Also, try to acquire the names of a broker’s past clients. They could provide a window into the loan broker’s process and the overall experience of working with that broker.
Check online databases: Search online resources like the American Association of Commercial Finance Brokers or the National Small Business Association to check the legitimacy of loan broker. A broker who appears in the database likely follows ethical standards.
How to get out of a bad loan
If you end up working with a shady broker and taking out financing you can’t afford, refinancing may be your only solution. Refinancing a business loan would require you to apply for a new loan to pay off your existing debt. Even though you could avoid commissions or other fees by refinancing directly with a lender, it may be difficult to secure better rates and terms unless the underlying conditions of your business have somehow changed or improved since taking out your first loan.
But, hiring a business loan broker could turn out to be beneficial, especially when you need funding in a hurry. A broker could save you time and money, as long as you’re careful about who you choose.