Trying to sort out your financing options as a small business owner can be complicated. Many owners are so busy running their day-to-day business operations that they don’t have time to turn into a one-person finance department, too.
If this sounds like you, then turning to a business loan broker might be a good option. Business loan brokers can help you find the best financing options and streamline the loan application experience so you can focus on running your business.
What Is a Business Loan Broker?
A business loan broker acts as a middleman between you and lenders. You’re certainly free to shop for a business loan with each individual lender, and many people do. However, if you don’t have time or if you’re not confident about the loan-shopping process, a business loan broker can be handy.
Business loan brokers connect you with lenders they work with. The working relationships they have with specific lenders let them know which ones are best for your company’s specific financial situation. Brokers will send applications out to their lenders on your behalf, and if you’re approved, they’ll hand you off to your new lender to complete repayment on your loan.
Some business loan brokers may charge upfront fees to the borrower, but the more reputable brokers get paid by the lender. The cost varies, as there are no standardized or regulated commission rates. Most brokers charge between 1% to 6% of your loan amount.
Business Loan Broker vs. Business Lender
Business lenders are institutions that loan out money directly from their own accounts to business owners. Business loan brokers, on the other hand, don’t lend you money, they find you the best lender and help coordinate the business loan application process.
Types of Business Loan Brokers
Most business loan brokers specialize in certain types of business loans. So make sure you know which type of product you’re looking for first, and then choose a business loan broker that specializes in that product.
Commercial Loan Brokers
Commercial loan brokers have knowledge of and access to various loan products. If you’re unsure of the type of loan you need, a commercial loan broker can provide you with several options to help hone in on what’s right for you.
Startup Loan Brokers
Getting funding as a new business can be challenging because most lenders have a minimum time-in-business requirement. Business loan brokers who specialize in startup funding can help you overcome this barrier.
Invoice Factoring Brokers
Invoice factoring is a type of financing where you sell your invoices to a factoring company for a fee in exchange for cash upfront, typically 85% to 95% of the total invoice amount. The factoring company becomes responsible for collecting the invoices, and once it collects, you’ll receive the remaining funds, minus the fee. Invoice factoring brokers can help pair you with factoring companies with the best terms.
Equipment Financing Brokers
Equipment loans are secured loans that require collateral—something of value that lenders can repossess if the business fails to repay. In this case, the collateral is typically the piece of equipment you’re financing. It’s ideal to use an equipment financing broker because of the added requirements that they understand.
Merchant Cash Advance Brokers
Merchant cash advances (MCAs) front you an amount of cash that you pay back over time as a percentage of your receipts. This type of lending can be expensive, but it allows you to repay your loan with payments that scale with your cash flow. MCA brokers can help determine if this expensive business financing is right for you, and if so, find a lender that fits your needs.
When Should You Use a Business Loan Broker?
It’s a good idea to consider a business loan broker if you want to find the best possible deal without doing the research yourself. Researching different loan options is time consuming, and it’s not always clear which one will be the best for you.
Business loan brokers also have access to information that might not be available to you or listed on a lender’s webpage. They’re also generally more familiar with each lender’s approval criteria, which many lenders don’t share with potential customers. Having an insider with more knowledge than you can help you dial in on the best option quicker than you would on your own.
This point is especially relevant if you have a less-than-ideal situation, such as if you’re a startup or if you have damaged personal credit. A business loan broker can help you find the best options among lenders who are able to work with you.
How to Pick the Best Business Loan Broker
You can find business loan brokers through a few different routes. A simple Google search is always the most direct route, but it’s also a good idea to ask fellow business owners and even your local small business development center for any recommendations.
Once you have a list of a few business loan brokers, contact them to ask for more information and ask them:
- How many lenders do you partner with? A lender who works with more lenders is more likely to give you better results.
- How many applications will you send out? A lender that only sends your application out to a few targeted lenders shows that they’re more experienced than someone who takes a shotgun approach with many applications.
- What is your process like? Find out how much work is required from you before you begin.
- How long does the process take? Business loan brokers are often very quick, but be sure you’re OK with the timeline before you accept their services.
It’s also crucial to look up reviews from independent websites, like the Better Business Bureau (BBB), Trustpilot and Google. You can also ask your business loan broker for references of past clients that you can chat with.
Business Loan Broker Red Flags
There’s a lot of money to be made by business loan brokers, and that can attract some shady characters. Keep an eye out for these red flags as you’re shopping around, including if the broker:
- Is hard to get ahold of
- Has poor reviews, especially recent ones
- Requires you to pay for their services, rather than the lender
- Has a website with vague information, and only one contact method
- Only works with one lender (in this case they’re a salesperson, not a broker)
Business loan brokers can save you a lot of time and money when you’re shopping for a loan. Some people choose not to work with brokers because they worry that they’ll steer them into certain loans (i.e., the ones with the biggest kickbacks), or that they’ll find cheaper rates by approaching lenders on their own.
That’s certainly possible, but if you stick with reputable business loan brokers, you’ll generally have a better experience than not. That’s especially true if you’re short on time, not sure what to do or have unusual funding requirements.