Many entrepreneurs attempt to avoid loan brokers when seeking financing for their companies. And, it is, partly, understandable given the bad reputation that many brokers have (especially in the business loan and commercial mortgage industry).
In many borrower’s eyes, business loan brokers are only middlemen between them and the actually lenders; middlemen who only seem to bring a new, increased layer of costs to the entire loan process – a genuine deterrent to businesses seeking outside financing which is often alone a really expense and frustrating endeavor in the initial place.
Unfortunately though, many business lenders prefer to utilize loan brokers for two primary reasons:
Using loan brokers allow lenders to reduce their overall marketing expenses. Thus, they can focus more on creating and developing their loan programs to raised meet business borrower needs along with focus on the underwriting (which is what their business is truly all about).
Lenders also prefer loan brokers as they give one more level of filtering applicants. In addressing several lenders in the unsecured business loan industry, it appears that only 1 in 10 applicants will in actuality qualify for a small business loan product. Thus, these lenders have to pay both time and effort in pre-screening potential applicants that may really increase their overall costs – Remember that as their costs rise, so does the costs to the potential borrower as all costs get past on – thus, most lenders elect to let loan brokers filter and pre-qualify potential clients.
But, brokers can offer a little bit of value to busy business owners. Contacting a broker who has many contacts within the industry can not only save the business owner time (and time is money) but might help a small business owner determine and identify which products and which lenders may be best for their business – products or companies that many business owners may not know about.
Plus, brokers may do a lot of the leg work for the business owners – freeing the owner’s time to carry on to concentrate on running and growing their business. The trade off and potential cost saving is really a balance between the increased fees or increases costs of employing a business loan broker and the trouble (expense of the owners time) to be drawn away from the business and finding and coping with lenders on the own.
Most business loan brokers are honest, hard working people who actually desire to simply help your business discover the capital its needs. But, like most industries today, you will find always bad apples.
When seeking to hire a loan broker, listed below are five questions you need to bear in mind before you sign any contract, pass along any business financial information or pay any fees:
Look for references then actually follow-up with those provided. Now, bear in mind that many brokers will pass along their best references which is often somewhat misleading. So, either try to find a few other companies that have used the broker previously or ask the set of references if they know of other businesses who have used that broker.
Ask the broker what your business could reasonably expect and then try to have that in writing. The key here’s to listen. Listen as to the will be said and to your own personal instincts. When you have any doubt or simply think that the offer is too good to be true, then walk away.
Inquire about the full time it will need for your business to actually receive funding. Most business owners seeking capital usually need funds immediately – not four or five months down the road. This can not only allow your business to judge the worthiness of the broker but to also impress upon them your time frame requirements – remember, you’re actually hiring them and should expect results that meet your needs and not theirs.
Inquire about costs – not only the fees involved but the different overall costs that are a part of different business loan products. For instance, most secured or unsecured business loans are pretty self-explanatory given a stated annual interest rate. But top small business broker, other products, like account receivable factoring or business cash advances, aren’t require to mention their rates like traditional business loans. Thus, a 5% rate for an advance against your business’s invoices might actually cost much higher than a traditional term loan over the same period. If the broker cannot reasonably explain the financing costs to you in terms that are easily understood, then a broker may not have a very firm grasp on the products that they are brokering on your own behalf.
And, lastly, fees. Ask if they might need a fee from your business or will they receive their payment from the lender? Will these fees, especially if from your business, be required upfront or when the loan is obviously funded?
Having upfront fees is currently becoming, unfortunately, typical in this industry – partly because of the financial turmoil inside our economy but additionally because many brokers desire to weed out the looky loos and only handle serious businesses. Keep this in your mind, an upfront fee is OK so long as it is accompanied with some kind of guarantee – like being refunded if the broker cannot obtain your business the agreed upon quantity of funding or offset against other broker or lender fees when funding does occur.
Also, it is obviously beneficial to spend time researching the countless different products that are available to new or growing businesses. In this manner, you are able to better evaluate the broker’s recommendation. For instance, you’d rather have a broker recommend and pursue a loan product that’s best for the company and not merely the very best for the broker.
While brokers may be just middlemen, they’re also becoming more prominent in this industry and a new link in the financial chain that is apparently here to stay. But, brokers don’t need to be an Achilles heel for your business when seeking capital if you and your business concentrate on using them to your advantage. If you can pull this off using the tips outlined above, brokers might actually be worth using as then they become the eyes, ears and legs for your business through your business loan pursuit – allowing you, the business owner, to carry on building the profitable business you have always dreamed of.