Many entrepreneurs attempt in order to avoid loan brokers when seeking financing for his or her companies. And, it is, simply, understandable given the bad reputation that numerous brokers have (especially in the commercial loan and commercial mortgage industry).
In many borrower’s eyes, business loan brokers are merely middlemen between them and the actually lenders; middlemen who only seem to bring a new, increased layer of costs to the whole loan process – a real deterrent to businesses seeking outside financing which may be on it’s own a very expense and frustrating endeavor in the very first 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 could focus more on creating and developing their loan programs to better meet business borrower needs as well as focus on the underwriting (which is what their business is really all about).
Lenders also prefer loan brokers as they give an additional degree of filtering applicants. In addressing several lenders in the unsecured business loan industry, it would appear that only 1 in 10 applicants will actually qualify for a small business loan product. Thus, these lenders have to invest both time and effort in pre-screening potential applicants which could really increase their overall costs – Bear in mind that as their costs go up, so does the costs to the potential borrower as all costs see through on – thus, most lenders decide to let loan brokers filter and pre-qualify potential clients.
But, brokers can offer a bit of value to busy business owners. Contacting a broker who has many contacts within a can not just save the company owner time (and time is money) but will help a small business owner determine and identify which products and which lenders might be best for his or her business – products or companies that numerous business owners might not know about.
Plus, brokers may do much of the leg benefit the company owners – freeing the owner’s time to continue to target on running and growing their business. The trade off and potential cost saving is just a balance between the increased fees or increases costs of using a business loan broker and the cost (expense of the owners time) of being drawn from the company and finding and coping with lenders on the own.
Most business loan brokers are honest, hard working folks who actually desire to greatly help your organization get the capital its needs. But, like most industries today, you will find always bad apples.
When seeking to hire a loan broker, here are five questions you should keep in mind when you sign any contract, pass along any business financial information or pay any fees:
Look for references then actually followup with those provided. Now, keep in mind that most brokers will pass along their best references which may be somewhat misleading. So, either try to find additional companies which have used the broker previously or ask the list of references if they know of other businesses who’ve used that broker.
Ask the broker what your organization could reasonably expect and then try to have that in writing. The main element listed here is to listen. Listen to what is being said and to your own instincts. If you have any doubt or simply just think that the offer is too good to be true, then walk away.
Enquire about the time it will need for your organization to actually receive funding. Most business owners seeking capital usually need funds immediately – not four to five months down the road. This can not just allow your organization to judge the worthiness of the broker but to also impress upon them your own time frame requirements – remember, you are actually hiring them and should expect results that meet your requirements and not theirs.
Enquire about costs – not only the fees involved but different overall costs which can be a part of different business loan products. For example, most secured or unsecured business loans are pretty straight forward given a stated annual interest rate best small business loan broker. But, other products, like account receivable factoring or business cash advances, are not require to mention their rates like traditional business loans. Thus, a 5% rate for an advance against your business’s invoices may actually cost much higher than a traditional term loan over the exact same period. If the broker cannot reasonably explain the financing costs for your requirements in terms which can be easily understood, then a broker might not have a very firm grasp on the merchandise that they are brokering on your behalf.
And, lastly, fees. Ask if they need a fee from your organization or will they receive their payment from the lender? Will these fees, especially when from your organization, be required upfront or once the loan is obviously funded?
Having upfront fees has become becoming, unfortunately, the norm in this industry – simply as a result of financial turmoil inside our economy but additionally because many brokers want to weed out the looky loos and only cope with serious businesses. Keep this in your mind, an upfront fee is OK as long as it is accompanied with some kind of guarantee – like being refunded if the broker cannot obtain your organization the agreed upon level of funding or offset against other broker or lender fees when funding does occur.
Also, it is obviously advantageous to spend some time researching the numerous different products which can be available to new or growing businesses. In this manner, you are able to better evaluate the broker’s recommendation. For example, you’d favour a broker recommend and pursue a loan product that’s best for the company and not only the best for the broker.
While brokers might be just middlemen, they’re also becoming more prominent in this industry and a new link in the financial chain that seems to be here to stay. But, brokers do not have to be an Achilles heel for your organization when seeking capital in the event that you and your organization give attention to using them to your advantage. When you can pull this off utilizing the tips outlined above, brokers may actually be worth using as they then end up being the eyes, ears and legs for your organization throughout your business loan pursuit – allowing you, the company owner, to continue building the profitable business you have always dreamed of.