Getting funding for your small business—that’s tough work. It takes a ton of time to do all that research, analyze the needs for your business, find a respectable lender, negotiate a deal you can live with, understand the terms of your finances, etc.
So why not just find someone to do it for you?
That’s right — we’re talking about small business loan brokers. These people match up business owners and business lenders like it’s their day job. Small business loan brokers could save you time, energy and maybe even money, if you consider the opportunity costs of searching on your own.
Let’s talk about why small business owners get brokers for their business loans—and what you should look out for if you do so. After all, some brokers can be known for being “loan sharks” more interested in making a quick buck than helping small business owners get the funding they really need.
Why get a broker?
Like we mentioned, the conventional wisdom behind hiring a broker deals, mostly, with saving yourself the time and effort. It’s the same principle behind using travel agents, real estate agents, and concierges, if you think about it.
Besides saving time and energy, what are the supposed advantages of partnering with a loan broker?
- Get the best rate. Small business loan brokers are supposed to float your loan application to a bunch of different lenders so that they can find the best rate possible for your financing. If you only looked at one lender instead, you’d never know if you could have gotten a better deal somewhere else.
- Explore alternative options. Even if your funding application gets denied by a bank, a broker should be able to help you look into the alternative lending landscape.
- Don’t sweat the details. This goes hand-in-hand with not wasting your time and effort, but the point is really that you can focus on running your business while your broker works on funding it.
- They’re experienced. The best brokers have relationships with an extensive network of lenders. They’re people people — and getting good deals is often all about having the correct contacts. Plus, they’ll be able to tell quality deals from highway robbery — they’ll have seen it all before.
- They’re knowledgeable. Debt service coverage ratios? Invoice financing versus merchant cash advances? Business credit versus personal credit? A loan broker’s area of specialty, unsurprisingly, should be loans — so your broker would ideally be able to explain all the complicated words and acronyms to you with no problem, and all the options there to save you time and money.
Finding small business loan brokers.
These all sound like great advantages. Except, more often than not, they’re unfulfilled. With so little regulation and so much incentive to make money, small business loan broker have largely turned to sly and dishonest tactics. And small business owners are the ones who get hurt.
There are still some small business loan brokers out there who genuinely want to help you and your small business. Think through and ask the following questions to figure out if your broker is trustworthy.
- What’s the total cost of my loan?
- What extra costs are you adding? Is the lender paying your cost, or am I?
- How many lenders are you shopping my application to?
- Do you have any special arrangements with specific lenders?
- What’s the downside of this loan?
- Will you sell my information to third parties? How will you protect it?
- Can I take some time to consider?
Watch out for red flags.
Finally, be on the lookout for some of these red flags when thinking about partnering with a small business loan broker. If you notice any, consider that they probably indicate the broker’s best interests aren’t aligned with your own.
No physical address
- No toll-free or connecting phone number
- No testimonials, references, or time in business
- No fee disclosure
- “Guaranteed” loans, no matter your credit score or history
That last one, especially, means that if you do get an offer, it will probably be an especially expensive one. There’s a huge difference between a broker working to get you the funding you need, and a broker working to get you any funding. Some even prefer that you take a worse deal, because they might be getting paid more. Though hiring a loan broker might save you time and effort, the odds are not in your favor. The chances are, you’ll wind up spending more of both to undo the damages.