As a small business owner, trying to figure out financing options can be a laborious and complicated affair. When you’re so busy trying to find financing opportunities, your day to day work can suffer.
Looking for a business loan broker could be a good idea. Business loan brokers can help you find the best financing options and streamline the application process so you can focus on running your business.
Just what do they do?
A business loan broker acts as a middleman between you and lenders. You can shop for a business loan with each lender, however, if you don’t have time or if you’re not confident a business loan broker will come in handy.
Business loan brokers can connect you with lenders they work with. The relationships they have with certain lenders can offer you what’s best for your company’s financial situation. They will send applications out on your behalf, and if you’re approved, you’ll be handed off to your new lender to complete repayment on your loan.
Some brokers may charge upfront fees to the borrower, but more reputable ones get paid by the lender. The cost can vary as there are no standardized commission rates. Most brokers charge between 1% to 6% of your loan amount.
Business Loan Broker vs. Business Lender
Business lenders are institutions that loan out money directly to business owners. Business loan brokers on the other hand, don’t lend you money, they find you the best lender and help coordinate the application process from start to finish.
Different Types of Business Loan Brokers
Most business loan brokers specialize in certain kinds of business loans. Make sure you know which type of product you’re looking for, and then choose a business loan broker that specializes in that product.
Commercial Loan Brokers
Commercial loan brokers have knowledge of and access to many different loan products. If you’re not sure of the type of loan you need, a commercial loan broker can provide you with several options to help find what’s right for you.
Startup Loan Brokers
Getting funding as a new business can be difficult and challenging because most lenders have a minimum time-in-business requirement. Business loan brokers who specialize in startups can help you overcome this barrier.
Invoice Factoring Brokers
Invoice factoring is a type of financing where you sell your invoices to a factoring company for a fee in exchange for cash upfront. This usually comes to 85% to 95% of the total invoice amount. The factoring company becomes responsible for collecting the invoices, and when it does collect, you’ll receive the remaining funds, minus the fee. Invoice factoring brokers can help pair you with factoring companies with the best terms.
Equipment Financing Brokers
These loans are secured through collateral; something of value that lenders can repossess if the business can’t repay the loan. The collateral is typically the piece of equipment you’re financing. It’s ideal to use an equipment financing broker because of the added requirements that they specialize in.
Merchant Cash Advance Brokers
Merchant cash advances (MCAs) front you an amount of cash that you pay back over time as a percentage of your receipts. This type of lending can be costly but it allows you to repay with payments that roll with your cash flow. MCA brokers can help determine if this expensive business financing is right for you, and a lender that fits your needs. These types of loans are typically a last resort sort of option, but with the right broker and proper research, they can work.
When is it Time to Use a Business Loan Broker?
It’s a good idea to consider a business loan broker if you want to find the best possible deal without having to do the research yourself. It is time consuming, and it’s not always clear which one will be the best loan for you.
Business loan brokers also have access to information that you are not privy to, or that is not listed on a lender’s webpage. They’re also more familiar with each lender’s approval requirements, which most lenders don’t share with potential customers
This point is relevant if you have a mediocre situation, such as if you’re a startup, or if you have a low personal credit score. A business loan broker can help you find the best options among lenders who are able to work with you.
How to Choose the Best Business Loan Broker
You can find business loan brokers through a few different routes. A Google search is always the most direct route, but it’s always a good idea to ask fellow business owners and even your local small business development center for ideas.
When you have a list of a few business loan brokers, contact them to ask for more information. Here are some questions to start with:
How many lenders do you partner with?
A lender who works with more lenders is more likely to give you better results.
How many applications do you usually send out?
A lender that only sends an application out to a few targeted lenders shows that they’re more experienced than someone who takes a shotgun approach with many applications. Throwing everything against the wall to see what sticks is usually not the best option.
What is your process like?
Find out how much work is required from you before you begin.
How long does the process take?
Business loan brokers are often very quick, but be sure you’re OK with the timeline before you agree to terms.
It’s also a smart idea to look up reviews from websites like the Better Business Bureau (BBB), Trustpilot and Google. You can also ask your business loan broker for references of past clients.
Warnings: Business Loan Broker Red Flags
There’s a lot of money to be made by business loan brokers, and that can attract some shady characters. Keep an eye out for these red flags when you’re shopping around, including if the broker:
- Is hard to reach when you need him or her
- Has poor reviews, especially recent ones
- Requires you to pay for their services, rather than the lender
- Has a poor website with vague information, and only one contact method
- Only works with one lender (in this case they’re a salesperson, not a broker) or has limited connections.
A business loan broker can save you time and money when you’re shopping for a loan. Some people choose not to work with a broker because they worry that a broker will steer them into certain loans with back door deals, or that they’ll find cheaper rates by approaching lenders on their own.
That’s a possibility, but if you stick with reputable business loan brokers, you’re bound to have a better experience. If you’re in a rush or have complicated requirements, then a broker will be able to service your needs and know where to go to get you the best loan possible.