So you’ve realized you need a business loan.
You’ve probably searched for options a few times already, and you’re now at the point where you know the basics of business financing, but you’ve still got important questions.
Namely: should you work with a direct business lender or a business loan broker to get your funding?
The answer isn’t always straightforward, especially since there are hundreds of companies offering funding for small business owners in the United States alone. The picture can be even more complicated in non-U.S. locations. This article focuses on what U.S. (and Canadian and Puerto Rican) business owners can do to maximize their chances of success with their next loan, and why they might want to choose a broker over a direct lender.
Let’s first define the difference between direct lenders and brokers, to better understand why entrepreneurs might choose one or the other for funding.
What is a direct business lender?
A direct lender is simply an entity that can offer funding to you out of its own resources.
Historically, most direct business lenders have been banks and credit unions, but many companies have formed in recent years to deploy capital to businesses in the hopes of getting good returns. These non-bank lenders may manage their own money, pool the money of a few high-net-worth investors, or even use a crowdsourcing approach to pool smaller amounts of money from a much larger number of investors.
Direct lenders can be good options for established businesses with track records of growth and profitability. A small business owner with good personal credit and business credit may see lower overall interest rates and fees, as well as higher loan amounts, from a direct lender — but this is dependent on finding the right lender at the right time.
What is a business loan broker?
A business loan broker, also known as a commercial loan broker, doesn’t provide funding from its own capital resources. Rather, brokers maintain relationships with large networks of direct lenders, which they can tap to find the best funding option for any given business situation.
Since brokers make money through fees from connecting businesses to lenders, it’s in their best interest to seek out the best options, with the highest overall loan amounts, at the lowest rates.
Businesses that need capital quickly and don’t want to be forced to repeatedly jump through hoops by different lenders can benefit from working with a commercial broker. A broker’s large network often provides businesses — particularly newer businesses or those with spottier financial histories — with the best chance of getting approved for the funding they really need.
Why work with a direct business lender?
As mentioned earlier, a direct lender can offer lower rates and higher loan volumes to certain businesses. If your business meets these criteria, a direct lender may be a good choice:
- You have established business financial history
- You have strong personal (owner) credit and business credit
- You have an existing relationship with a reputable lender
- You have a solid business plan and/or financial projections
As you can see, this list rules out many businesses, whether they’re recently formed, have weaker credit histories, don’t have any existing relationships with direct lenders, or simply haven’t put together detailed business plans.
Many larger and older businesses choose to work with direct lenders because they meet these four criteria. An existing relationship can be surprisingly helpful, as a direct lender you know is more likely to direct you to the right type(s) of business funding for your situation, and can also speed the processing of your application. For example, you are better offer dealing with the direct lender when using a merchant cash advance.
You can always initiate these relationships yourself by meeting with loan officers from direct lenders in your area, whether by walking into a bank branch or through a fortunate meeting at a local networking event.
Why work with a business loan broker?
A small business owner never has quite enough time to do everything they’d like to do, and filling out loan applications over and over can be a major drain. Working with a business loan broker is often the best way to save time, by quickly tapping into a large network of high-quality lenders at once.
Commercial brokers can be good options in the following situations:
- You don’t have experience securing business loans
- Your business is newer and/or has a weaker credit history
- You don’t have a lot of time to spend on the loan process
- You want to have as many funding options as possible
Many small business owners can benefit from working with a business loan broker for these (and other) reasons, but a broker’s ability to save you time while securing more appealing funding options shouldn’t be overlooked.
Entrepreneurs often discount the value of their time, but they shouldn’t — particularly when it comes to applying for business funding.
Since many direct lenders want to see a detailed business plan before approving any funding, a business owner can easily consume dozens of hours in the development and polishing of a business plan.
Applying to each direct lender independently can also quickly consume many hours. You’ll have to fill out complex forms, provide extensive records, and even secure business references before many direct lenders will accept your paperwork. An individual direct lender may also have fewer funding options and tighter approval requirements than you want. You may not figure this out until after you’ve spent hours on an approval that’ll only be rejected in the end.
Business loan brokers like Amerifi have built relationships with many lenders, and can manage approvals and rejections while also negotiating better rates and higher amounts for you. In the end, working with a business loan broker can save many hours of valuable time, while also securing a loan at better rates and amounts than you might have found on your own.
How to choose the best business loan broker
We’d love to work with you to help you get your next business loan, but we also want you to be informed about the process, and we want you to have a funding relationship that’s right for your business.
When looking for the best business loan broker, you may want to ask your prospective broker these questions, to make sure they have the experience and integrity to serve your needs:
- How many lenders do you work within total?
- How many lenders will you send my application to?
- Do you have any special deals or arrangements with any lender?
- What fees will you be taking from my funding?
- What will the total cost of my funding be after all fees?
- What are the risks of the funding options you’ve proposed?
- Will you sell my information?
- How do you secure my information against theft or hacking?
By asking the right questions and listening as much as you talk, you can get a much clearer picture of a prospective broker’s fit with your immediate and/or long term needs.
Want more information on your business funding options? Feel free to reach out to one of our credit and lending specialists today.