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A business loan broker connects business owners to lenders offering the type of loan they need. They do not work exclusively with one bank or lender; instead, they have connections with many. Using a broker who knows the ins and outs of business loans can help a small business owner compare business loan rates and loan terms without individually applying to a multitude of lenders.But how exactly do business loan brokers work? Will it cost you more to use one? Is it better to do the legwork yourself? Read on to learn the pros and cons of using a broker to get a small business loan.
What Is a Business Loan Broker?
A business loan broker (also called a commercial loan broker) is an agent that can help guide you through the sometimes intimidating aspect of applying for business loans. The broker does not approve the loan or provide the financing. They are simply servicers to connect the two parties. Because they’re knowledgeable about all kinds of financing options and have relationships with different types of lending partners, from traditional banks to online lenders, a broker can be helpful for finding the right type of financing for your business.Brokers can also help you navigate the application process, acting as a middle person between you and your lender.
How Financing With a Business Loan Broker Works
Instead of applying directly to a lender, you provide your financial information to the broker, who then reviews your information and communicates with lenders on your behalf. Once they have received offers, they present you with your options and you can choose the one you like best. Sometimes they act as a liaison between you and the lender until the loan is processed. Other times, you may complete the application directly through the lender.
How Much Business Loan Brokers Charge
Some business loan brokers may charge fees to the borrower, such as a “success fee” for closing the loan or a small percentage of the approved loan amount. In many cases, however, they get paid by the lender. There are no standardized or regulated commission rates, but most brokers charge lenders between 1% to 6% of your loan amount.Before you start working with a broker, it can be a good idea to discuss not only loan terms for the funding, but also whether you will be required to pay the broker any fees.
Types of Business Loan Brokers
In many cases, small business loan brokers will focus on one type of financing or on a particular industry. Below are some of the different types of small business loan brokers that may be available to you.
SBA Loan Brokers
The Small Business Administration (SBA) backs certain loans you can get through traditional financial institutions like banks or credit unions. SBA loans have very specific requirements and, as a result, are known for being one of the more difficult types of loans to qualify for and apply for. An SBA loan broker can make both applying and getting approved for an SBA-backed loan a lot easier. 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
When your business is new and doesn’t have an established credit history, it can be difficult to find business loans you qualify for. However, this is where a startup loan broker can help out.This type of loan broker can help you identify short- and long-term loans for startups you’re likely to qualify for. Just be aware that as a new business, banks may require you to sign a personal guarantee and may even require collateral to secure the loan.
Commercial Loan Brokers
A commercial loan is another name for a business loan. Sometimes this type of loan is secured with collateral owned by the business, and sometimes it’s not — it all depends on the business and the loan product.A commercial loan broker typically has extensive knowledge about a large variety of business loan types available to small business owners. If you have a few different financing needs and want to see a range of options, a commercial loan broker can help.
Equipment Financing Brokers
Whether you are looking to lease or finance business equipment, a broker who specializes in equipment financing can help guide you towards the best option.Even if you don’t have great credit or much credit history, an equipment financing broker can likely present you with options, such as an equipment loan that requires you to pay the loan back faster or use the equipment as collateral, or a sale-and-leaseback option.
Factoring Brokers
A factoring loan (also called invoice factoring or accounts receivable financing) is a type of short-term financing where you sell your outstanding invoices to a lender at a discount. The lender that purchases the invoices is then responsible for collecting on the bills. A factoring broker steers businesses to the best factoring options on the market.
Merchant Cash Advance Broker
Merchant cash advances allow businesses that don’t have good credit to borrow money against future revenue. They allow you to get cash up front in return for a portion of your business’s future salesWhile merchant cash advances are not technically loans, they often come with short repayment periods and high interest rates. Therefore, it can be difficult to find one with terms that suit your budget and needs, which is where a broker comes in.
Pros and Cons of Business Loan Brokers
One of the key advantages of using a business loan broker is that it can be quicker and easier than applying to multiple lenders individually. A broker may also be able to find you loans with better terms or introduce you to potential lenders you might not find on your own. And, you often won’t pay anything extra for their services, since many brokers earn a commission from the company that gives you the financing.But there are also some potential downsides. One is that if a broker receives a commission on the loan from the lender, then the broker’s interest and lender’s interests are the same – they both benefit from getting clients to take out the largest amount possible for a loan. This could incentivize a broker to persuade a business to apply for a loan that is larger than the amount that they need. A broker could also potentially favor certain lenders over others, perhaps because they earn a higher commission from those lenders.If, on the other hand, the broker charges the borrower for their services, it can end up being more costly to use a broker than doing the legwork yourself.Here’s a snapshot look at the pros and cons.
Pros of Business Loan Brokers
Cons of Business Loan Brokers
They can save borrowers a lot of time and energy.
Commission-based brokers might encourage borrowers to take out larger loans than they need.
They have extensive knowledge of the lending market.
They can’t give a guarantee that they are finding borrowers the best loan.
Business loan brokers don’t actually lend you money; they find you the best lender and help coordinate the business loan application process. Business lenders, on the other hand, are institutions that loan out money directly from their own accounts to business owners. Here’s a closer look at the differences between the two.
Provides Funding?
Compare loan options from other lenders?
Good for low to no credit borrowers?
Will speed up rate shopping?
Broker
No
Yes
Yes
Yes
Who Can Benefit From Using a Broker?
While you can find and apply for business loans on your own without the help of a broker, small business loan brokers offer a number of benefits that are worth considering. They can be especially helpful if you……are too busy to research financing options. A broker already has relationships established with lenders and can help you identify the best deal and apply for a loan in less time than it would take on your own.…need the money right away. A broker will likely know how to push your application through faster, enabling you to get access to cash sooner.…are a new business owner or have never applied for a loan before. The expert guidance of a broker 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. …have a poor credit score. A broker can often help you find lenders who are willing to work with someone of your credit profile.
Questions to Ask Business Loan Brokers
Do They Have Experience in Your Industry?
It can be a good idea to choose a broker who understands your business and knows why you are seeking outside capital. A broker with experience in your industry will likely be better able to explain why certain loan products are better for your business than others.
What Is the Total Cost of Their Service?
Most brokers receive payment through lenders, but some directly charge the borrower. While both have their own pros and cons, it’s important to know what you’re getting into before you hire anyone.
Is There a Cooling Off Period?
Do you have a few days to withdraw from a contract? This can be helpful if the reason you are seeking financial assistance is due to a temporary problem (such as unpaid invoices) that may get resolved. It can also be beneficial if you are also applying for financing on your own and might receive a better offer elsewhere.
How Many Lenders Will They Find for You?
Generally, the more the better. Brokers who only work with a small handful aren’t really saving you much time, nor are they giving you a good snapshot of the market in terms of interest rates.
Where Did They Get Their Training?
A broker who has an extensive education and years of professional experience is obviously the better choice when compared to someone who simply became a broker by happenstance.
Do They Do In-House Underwriting?
Sometimes lenders allow brokers to decide if you are financially worthy enough to receive a loan. If this is the case, it can expedite the loan application process.
How Quickly Do They Work?
If you needed a loan yesterday, how quickly can they present you with options? Sometimes brokers don’t operate on the same schedule as you and can be a waste of your time.
Alternatives to Business Loan Brokers
The alternative to working with a loan broker is to do the research yourself. There are many comparison websites online these days that make it easy to compare loan products, so finding information isn’t difficult. To get an accurate picture, you will likely need to know your credit score, as well as your business’s credit score, revenue, and debt-to-income ratio (DTI).
The Takeaway
A business loan broker connects new and established companies with lenders who want to work with them. If you don’t have the time to shop around or you’ve been turned down by multiple lenders, using a broker can be a big help.If you use a broker who earns a commission from the lender, it won’t cost you anything for their services. The downside to this payment set-up is that it can give brokers an incentive to sell you larger loans, or favor lenders who pay them a higher rate. If you’re looking for a quick and easy way to research loan options, Lantern by SoFi can help. With our online lending platform, you can compare offers from multiple small business lenders by filling out one application.
Frequently Asked Questions
Where do you find small business loan brokers?
Are there any up-front fees for a small business loan broker?
Can small business loan brokers help if you have bad credit?
Can startups get loans through brokers?
How secure are business loan brokers?
Photo credit: iStock/fizkes
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About the Author
Lauren Ward
Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
