It can be overwhelming to apply for small business financing to grow your business, so many small business owners just don’t bother. They continue to struggle, and business growth is stunted. Enter, business loan brokers.
Yes, small business lending can be confusing, but if you’re one of the 40% of businesses who apply for a loan to fuel growth or fund other business initiatives, you might need a little help.
Meet the business loan broker. This individual can be your guide to navigating the sometimes tricky waters of small business lending.
What are Business Loan Brokers?
Small business loan brokers make money by helping business owners obtain business cash flow loans, equipment loans, expansion loans, and other types of small business financing. They usually get a commission as a percentage of the loan amount paid by the lender.
Because they’re knowledgeable about all kinds of financing options and have relationships with different types of lending partners, from traditional and non-traditional banks to credit unions, they may be your best bet to finding the right type of financing for your business.
Businesses that work with a commercial loan broker (another name for a business loan broker) may be able to find loans with better terms or introduce you to potential lenders you might not find on your own.
Best of all: you typically don’t pay to work with a loan broker, because the commission they earn is usually paid by the company that gives you the financing.
Types of Business Loan Brokers
Small business loan brokers aren’t all the same. Often, a broker will focus on one type of financing or a particular industry. Some specialize in short-term loans, while others focus on long-term loans.
Here are a few of the types of small business loan brokers you may encounter.
SBA Loan Brokers
The Small Business Administration backs certain loans you can get through traditional financial institutions like banks or credit unions. These SBA loans come with very specific requirements, and as a result, many businesses find it challenging to qualify.
That’s where an SBA loan broker comes in handy. They’ll know what qualifications you need to be approved for the different types of small business loans offered by the SBA, and can walk you through the application process.
Startup Loan Brokers
Running a startup? Finding business funding can be tricky if you don’t have a solid and long credit history. (Get your free business credit scores here.)
A startup loan broker can help you identify short- and long-term loans you’re likely to qualify for, which might require putting up collateral.
Commercial Loan Brokers
A commercial loan broker should have a wide knowledge of financing options, as well as relationships with a variety of traditional financial institutions and online lenders. If you’re looking for the most options, a general loan broker should be able to provide you with many.
Equipment Financing Brokers
If you’re looking to purchase or lease equipment, a broker with expertise in equipment financing can help guide you to the best option. If you have bad credit, there are some equipment loans that will require you to pay the loan back faster, use the equipment as collateral and may require a down payment. Your broker might also suggest a sale-and-leaseback option.
Factoring is the financing vehicle of choice in the textile industry, but is also widely used by businesses that bill their customers by invoice. Many businesses simply need a little cash to float them until clients pay their invoices. A factoring broker specializes in helping you find invoice financing or factoring opportunities where you sell your outstanding invoices to a lender who will then be responsible for collecting the debt.
Merchant Cash Advance Broker
For companies who don’t have good credit, need financing fast, and are good at managing their finances, a cash advance could be an option when it comes to keeping accessing needed capital. Alternative lenders look at your revenues and cash flow more than your credit scores, and a merchant cash advance broker can help you access capital based upon the funds in your credit card merchant account, even if you have a weaker credit profile — but it is usually pretty expensive.
Why Should You Use a Small Business Loan Broker?
While you can find business funding on your own without the help of a broker, small business loan brokers actually offer a lot of benefits you should consider.
Their expert guidance can assist you, not only in understanding your funding options, but also in finding lenders (or funding solutions) you couldn’t have found on your own. Even a small reduction in your APR can have big savings in the long run.
A broker can also save you time. Do you have days to spend looking for the best financing deal out there? Probably not. But a broker already has those relationships established and can help you identify the best deal and apply for a loan in less time than it would have taken you on your own. If you need the money yesterday, a broker will know how to push your application through faster so you get access to cash sooner.
And because business loan brokers are familiar with the small business lending environment, they know what lenders look for. They can look at your business credit and personal credit score before you apply so that you know the likelihood of being approved. They can advise you to choose the best financing for your business’ situation.
And because you don’t usually pay for a broker’s services, you have nothing to lose…and everything to gain!
How to Pick the Best Business Loan Broker
Now that you’re convinced that a small business loan broker could be your winning ticket to financing, the trick is in knowing how to choose the best commercial loan broker for your business.
Don’t be shy about asking brokers lots of questions. They are there to serve you, and you want to ensure that they’re the right fit for your specific needs as a borrower.
Where Did They Get Their Business Loan Broker Training?
It’s important to know that not every state requires business brokers to be licensed. There are all sorts of training programs available, all with varying levels of education and hands-on training.
You want a broker who has gone through a rigorous training program so that they are up to speed on commercial loan regulations and requirements, as well as business financing options.
How Many Lenders Will They Work With?
Some brokers take the shotgun approach, submitting a borrower’s application to many banks and online lenders without taking the time to truly understand the borrower’s needs.
You want a broker who, yes, has relationships with many lenders, but who ultimately analyzes your profile to select the lending option with the best chance of being approved.
Do They Do Any In-House Underwriting?
A broker doing some sort of pre-underwriting will have better placement results than someone who uses the shotgun approach. You want a broker who will spend time checking your personal and business credit, as well as your financials, to find the best lending options for you.
A broker should understand each lender’s underwriting criteria and know if you’re a good fit. As a metaphor: if one bank likes lending to triangles, and your business is a square, you don’t want a lender who’s going to try to force you to apply for a loan you have no chance of getting.
How Quickly, On Average, Can They Find You Money?
If you need money quickly, ask how long it typically takes a broker to fund a deal. Because brokers have lots of alternative funding sources, they should be able to provide funding much faster than traditional bank loans, which take, on average, 45 days to fund a loan. The average loan with a broker takes 10-15 days.
How Does the Broker Keep Your Data Secure?
Unfortunately, the small business lending industry is so new that there aren’t rules or regulations in place regarding a borrower’s sensitive information. Still, a good broker will take measures to protect your data online through encrypted technology.
What Do Reviews Say?
A seasoned broker will have reviews that give you a sense of what he or she is like to work with. You can find reviews you can trust on:
You should find a mixture of good, great, and perhaps even a bad review or two when dealing with a seasoned broker.
How Much Do Loan Brokers Charge?
Because industry is unregulated, there is no standardized or regulated commission rate. Some brokers charge upfront fees, while some charge fees based on successfully helping a borrower obtain funding. The most reputable broker gets paid by the lender for successfully matching them with a borrower.
A broker who charges you doesn’t do anything different from one who charges the lender.
Most loan brokers earn an average commission of 1-6% of the amount of your commercial loan or working capital agreement.
Before you start your loan application, discuss not only loan terms for the funding but also whether you will be required to pay the broker anything. There’s really no good reason you should pay a broker. Make sure you understand all the terms before you sign on the dotted line. If the broker can’t, or won’t, give you a full disclosure, you shouldn’t work with that broker
Signs You Should Avoid a Business Loan Broker
While there are many, many reputable small business loan brokers out there, there are also, unfortunately, some sharks who are not professional and who may only have their best interests in mind.
If a broker doesn’t have a website, a phone number, a physical address, or a professional email address, they probably aren’t all that invested in their work, and likely won’t be able to best serve you.
If you can’t find reviews or get references from past clients, that’s a red flag.
If they are not concerned about your credit history, that’s another potential red flag. A true broker will look at every aspect of your business’ finances to assess the best financing option for you.
If you sense that the broker will only get you the funding deal that makes them the most money, find someone else. You are not there to make a broker rich; you’re there to find a partner who will help you find financing that suits your immediate, intermediate, and long-term needs.
Nav’s Verdict: Small Business Loan Brokers
If the idea of going at it alone to find business capital makes you break out in hives, consider working with a business loan broker. As a business owner, you have enough on your plate without having to become an expert in business financing.
A professional small business loan broker can help businesses like yours find the right small business lender who will give you a great deal on a loan or line of credit.