Small Business Loan Brokers: What You Need to Know
What Is a Business Loan Broker?
If you’re a business owner exploring your financing options, you may have come across small business loan brokers. These individuals—sometimes referred to as commercial loan brokers—are essentially like any other broker you can work with.
Just like a real estate broker connects you with real estate, a business loan broker connects you with business loans. And in this case, a commercial loan broker would take information about your business and submit applications on your behalf to potential small business lenders—for a price, of course.
This being said, if you choose to accept a loan offer that a small business loan broker finds for you, you’ll either pay them directly for their services, or that fee will be included in the cost of your business loan. Some commercial loan brokers will charge you only if you successfully secured the loan, whereas others will charge you even if you don’t get the loan, but just for use of their services.
So, why opt for hiring a business loan broker instead of searching for financing on your own?
Generally, small business owners who choose to work with a commercial loan broker do so to save time, energy, and the hassle of exploring and applying to different financing products on their own. With this in mind, however, there are also a number of reasons you might avoid working with a business loan broker.
What’s the best choice for your business? In this guide, we’ll break down everything you need to know about small business loan brokers—exploring the possible benefits and drawbacks of hiring one—including questions to ask, red flags to watch out for, and protections to employ if you do decide to work with a commercial loan broker.
Should You Get a Business Loan on Your Own?
Before we dive into the details around working with a small business loan broker, let’s take a step back to discuss the process of getting financing on your own.
Of course, you have the option to explore your business loan options on your own (or with help from a partner, advisor, or employee) and completely bypass a third party like a commercial loan broker.
What does this process look like?
Ultimately, figuring out how to get a business loan requires a lot of steps: You’ll need to research all of your financing options, figure out what your business needs, find the right lenders to apply to, negotiate the deals you end up getting, understand the terms of your options, compare all your deals to each other, and more.
With all of the different pieces, factors, and variables involved with the small business loan process, it’s easy to feel overwhelmed, especially when you have the rest of your business to run. Plus, if you need access to financing fast, you may feel like you don’t have enough time to adequately compare your options, apply for the right products, and actually receive the funds you need.
Therefore, although securing a business loan by yourself is very possible, it’s for the above reasons that many business owners turn to a broker.
Why Should You Use a Business Loan Broker?
Small business loan brokers can save you time and energy, which is likely why some business owners are drawn to them when starting a loan search. After all, as we mentioned, when you’re operating a small business, you have a lot on your plate and commercial loan brokers can take the inconvenience of finding a business loan off your hands.
This being said, however, these are not the only reasons why you might consider hiring a business loan broker. Let’s explain:
Explore Your Options
These days, your lending options aren’t limited to commercial banks. You also can receive financing from alternative online lenders, and products from both banks and alternative lenders range from SBA loans to business lines of credit to invoice financing.
Therefore, whether you have limited financial knowledge, not enough time, or simply don’t want to go through the hassle of learning about all of the possibilities, you might use a business loan broker to explore the options on your behalf.
This broker may be able to connect you to more options than you’d find on your own, plus help you sort through the paperwork, applications, and offers that are involved in the process.
Get a Good Rate
A large part of the purpose behind commercial loan brokers is that they’re supposed to distribute your loan application to a variety of different lenders. This way, you can secure the best rate possible for your business financing because you can compare a variety of options and see how much each option will cost you.
On the other hand, if you were to only work with one lender, you’d never know if you could have gotten a better deal elsewhere. In this way, a small business loan broker should not only be able to present you with multiple options to consider, but also explain the different rates and how they work based on the product and lender.
Work With Someone Experienced
Even if you’ve explored your business loan options before, it’s very likely that you’re not an expert on loans and financing solutions. When it comes to commercial loan brokers, however, these individuals work with lenders 24/7—after all, it’s their job to understand the market and work with clients and lenders to find the right products.
With these established relationships and an extensive network of lenders, small business loan brokers can provide experience and expertise you wouldn’t have on your own. Ultimately, if your business loan broker has the right contacts and knows how to work with lenders, you should be able to get the best deal on a small business loan for your company.
They Have Lending-Specific Knowledge
Just as a small business loan broker can provide you with experience you wouldn’t otherwise have, they might also be able to offer lending and business finance-specific knowledge you wouldn’t have on your own.
So, if you’re confronted with some business loan terms or other information that you are unsure about, you should be able to turn to your commercial loan broker for clarification. As someone who deals in business loans professionally, they should be able to answer your questions, explain different terms and concepts, and generally serve as a knowledge base for the details you need to know to sort through and find a business loan that works for you.
How to Choose a Small Business Loan Broker
Considering these benefits (and if you’re willing to pay the fee), working with a commercial loan broker might seem like a no-brainer. Unfortunately, however, not all business loan brokers are working in favor of small business owners.
Therefore, although you might get lucky and stumble upon a small business loan broker that is trustworthy, fair, and helpful, this might not always be the case. After all, the world of small business lending is a fairly unregulated market, and this has allowed business loan brokers to take advantage of the lack of shared information in the industry.
Unfortunately, more often than not, commercial loan brokers have their own interests in mind during the loan approval process. So, with this in mind, before you decide to hire a business loan broker, you’ll want to determine if the individual you’re considering is reliable and trustworthy. To evaluate a potential small business loan broker, start with these questions:
1. What is the total cost of my loan?
There are currently no federal or state rules about how much commercial loan brokers can charge small business borrowers for a loan—giving brokers an easy, and legal, way to take advantage of borrowers.
Well, alternative lenders are used to paying small business loan brokers steep fees for passing on the business owner’s loan—anywhere from 7% to 17%. This means that for a $60,000 loan, a business loan broker could make $10,200.
However, that fee is often passed on to you. For example, a business loan broker might get you an offer for a $60,000 loan at a 15% interest rate, but then present it to you at a 32% interest rate to make up for their fees. As the borrower, you’ll never know that you were eligible for the same loan at a much lower interest rate had you not used the loan broker.
Therefore, as a best practice for finding a truthful commercial loan broker, you should ask any broker first what the cost of your loan is—namely your APR and interest rate. Then, you should ask what additional costs the broker is adding to your loan. This will help you understand if you’ll be paying more than you should for your loan.
Which Business Loan Brokers Charge the Lowest Fees?
In general, small business loan brokers working with community banks and credit units—especially those securing SBA loans—tend to charge the lowest fees on loans. These brokers will earn more modest fees of 1% to 3% of the total value of the loan.
2. How many lenders are you shopping my loan to?
In order to get the best loan for your small business, your small business loan broker needs to shop your loan to as many lenders as possible. If your application is being considered by multiple lenders, they’ll compete for your business—and you’ll get a better loan product with a low interest rate because of it.
Ideally, your loan broker will get offers from as many small business lenders as possible, and let you choose among those options free of pressure. Therefore, if a commercial loan broker tells you that you shouldn’t be shopping around your loan because they already know the lender with the lowest costs, you should take a step back.
This is definitely a red flag.
A business loan broker might indeed know the lowest cost option, but you should verify to make sure and consider a variety of options before making any decisions.
3. Do you make more money working with certain lenders?
Broker fees aren’t the same across all commercial lenders—you might get a small broker fee tacked onto your interest rate how with one lender, but an extremely high broker fee added to your interest with another.
Well, some lenders offer brokers higher fees if they can send good, qualified borrowers directly to them. This was a common practice in the mortgage industry, leading to the famed subprime mortgage crisis.
There isn’t a law regulating this agreement between small business loan brokers and lenders, so it’s in the hands of the small business owner to be vigilant. You should always ask your broker how their fee varies across lenders and their products. You’ll want to screen for business brokers that are looking to steer you toward the products and lenders that will reap them the highest reward.
4. Will you sell my information to any third parties?
After you give your information to commercial loan brokers to get a small business loan, you might find that in a week or so, your voicemail and email is bombarded with companies trying to sell you miscellaneous goods that you probably don’t need.
Why is this happening to you?
Well, many business loan brokers and lenders actually sell borrowers’ information (to anyone who will pay) without permission.
Commercial loan brokers and lenders shouldn’t be able to disclose borrowers’ information without the clear consent of the borrower—but some do. Therefore, it’s up to you to make sure that your information won’t be sold unless you give consent. Also, you should be particularly wary of the fine print within broker agreement contracts, just in case this permission is hidden deep inside their documents.
5. What are the downsides to this loan product?
Every business owner that’s taken out a small business loan knows that the process is tricky.
Once you’ve gone through the whole process to get a loan offer, you then have to navigate complicated loan documents to understand everything that’s involved. This being said, a small business loan broker should not only tell you what’s good about your loan, but they should also fill you in on the downsides as well.
For example, if you’re getting a short-term loan in only one business day—that’s fantastic. But, your commercial loan broker should also let you know that you’re paying a high interest rate.
Along these lines, you should also ask your small business loan broker for your APR so that you can compare your offers across multiple products. If your broker isn’t being upfront with the downsides of your loan offer, or helping you weigh it against other offers out there, then you should be skeptical of how great the loan product (and the broker) actually is.
6. Can I have time to think about my options?
Like any broker, small business loan brokers are working to close deals—they’ll only get paid when you take your offer. This creates an incentive to close deals quickly, and see what questions you have after.
The process of obtaining a small business loan can be a challenging one, so you shouldn’t feel pressured to make a rush on a decision if you don’t feel ready. Every borrower should have the ability to think about their decision and consult trusted friends, family, and advisors before they sign the dotted line.
Generally, you should ask for 48 to 72 hours to consider your loan if you need the time to make your final decision. If your broker doesn’t give you this amount of time, then their interests might lie elsewhere.
Business Loan Brokers: The Red Flags
By asking any business loan broker the six above questions, you should have a better sense of what your options are and whether the broker in question is looking out for your best interests. This being said, however, there are a handful of red flags you should also keep in mind—if you come across any of these six scenarios, you’ll likely want to avoid working with that particular commercial loan broker.
No physical address is listed on the broker’s website.
You shouldn’t be working with small business loan brokers that lack an actual address on their websites. If they don’t have a physical office, it might be a sign that they’re running a shady operation.
They have no references to offer.
The best commercial loan brokers will have testimonials and reviews to show from their real, satisfied, and funded customers. If they don’t, they might not have a great reputation for success.
They don't provide a phone number.
Talking about your loan options over the phone with a real person is helpful for any business owner trying to make their final decision on their loan product. Good business loan brokers will have a way for their clients to reach them and actually talk on the phone, not just over email.
Therefore, if a broker doesn’t provide a phone number or you only get an automated recording when you call, the broker (and the products they’re offering) might not be the real deal.
They're not concerned about your credit history.
Have you come across a loan broker’s website that makes these claims: “Bad credit okay!” or “Get a loan—guaranteed!”? If you have, you’ll want to watch out. Small business loan brokers that say they can get you any loan with any credit score, even if it’s not a good one, are lying.
Although there are absolutely business loans for bad credit out there, your personal credit score is a huge factor in what kind of loan you can secure.
They have no proven track record.
Finally, as we explained, one of the great reasons to use a commercial loan broker is to take advantage of their well-established connections and industry knowledge.
However, if a business loan broker is new to the game and running a brand-new business, you’ll want to do some research into the business owners and background. You’ll want to hold off on working with these small business loan brokers until you know that they have the experience that can help you find a great small business loan.
How to Protect Yourself Against Business Loan Brokers
As you can see, working with a small business loan broker can be complicated—sometimes you’ll find a trustworthy broker who will help you find the right financing and sometimes brokers are out to take advantage of you and other business owners.
And unfortunately, as we mentioned, business loan brokers typically aren’t subject to regulators—besides fair lending laws, a commercial loan broker isn’t subject to any federal oversight, making it easier to legally manipulate business owners looking for loans.
How do you protect yourself from these predatory practices?
First, you’ll want to keep in mind that highly regulated banks typically steer clear of small business loan brokers, so borrowers who can access traditional bank loans won’t have to worry about these issues.
But, if you can’t get a bank loan, you’re probably exploring alternative lenders. In this case, to protect yourself from exploitative practices and loan brokers, you can choose to work with lenders and small business loan marketplaces that abide by the Small Business Borrower Bill of Rights.
Fundera's Borrowers' Bill of Rights
What is the Small Business Borrowers’ Bill of Rights?
This agreement strives to fill the gap in federal and state regulations and protect small business owners from predatory commercial loan brokers.
With that goal in mind, lenders, brokers, and marketplaces have come together to form the Responsible Business Lending Coalition, defining what they believe all small businesses deserve in the Borrowers’ Bill of Rights.
How can this agreement protect you? Here’s what the agreement promises:
Transparent Pricing and Terms
If you’re working with a broker, lender, or marketplace that has agreed to follow the Borrowers’ Bill of Rights, you’ll see the cost and terms of the loans that you’re offered in writing. Most importantly, the cost of your business loan will be clear, complete, and easy to compare with all the other options you’re offered. This way, it isn’t just your business loan broker and the lender who’s in the know about how much you’ll pay.
Predatory commercial loan brokers often try to trap small business owners in long cycles of debt and re-borrowing so that they can get the most money out of you. The Borrowers’ Bill of Rights guarantees that you’ll be offered loan products that you can repay according to the original terms.
Small business loan brokers often set borrowers up for failure, not caring if they could actually repay the loans they were offered in the first place. If you work through a broker that has agreed to the Borrowers’ Bill of Rights, however, that broker will connect you to a lender that will perform your small business loan underwriting responsibly.
Fair Treatment From Brokers
If you’re working with a responsible commercial loan broker, you have the right to transparency, honesty, and impartiality in your interactions with that broker. This means that your broker lays out all of your loan options, tells you your fees in terms you can understand, and empowers you to make the best decision for your small business.
Inclusive Credit Access
Every small business owner has a right to access credit to grow their company. You have a right to fair and equal treatment when seeking a loan—and the Borrowers’ Bill of Rights guarantees that.
Fair Collection Practices
Finally, if you can’t repay your loan, you should still be treated fairly and respectfully. When lenders collect on defaulted loans, borrowers won’t be used by lenders as a primary source of repayment.
Who Abides by the Borrowers' Bill of Rights?
Now that you have a better idea of what the Borrowers’ Bill of Rights is and how it can protect you against predatory practices within small business lending, you’re likely wondering who is included within this agreement: Who actually has agreed to abide by these regulations?
The Borrowers’ Bill of Rights has more than 50 lenders, brokers, and marketplaces as signatories. In fact, with the help of seven other lenders and nonprofits, Fundera founded the Borrowers’ Bill of Rights to protect borrowers in their search for a small business loan and connect them to transparent and fair loan products.
With Fundera, your loan specialist can help you find funding from lenders that also abide by these practices.
Small Business Brokers: The Bottom Line
After everything we’ve discussed so far, you may be wondering how exactly to find a reliable business loan broker.
As we’ve just discussed, one of the first things you can do is look for small business loan brokers who abide by the Borrowers’ Bill of Rights. But how do you find these brokers to begin with?
Unfortunately, a simple internet search will turn out an overwhelming number of options, many of which will present some of those red flags we listed above. Therefore, if you do decide that hiring a commercial loan broker is the right option for you, you might consider looking for recommendations from your local government or community agency, SBA office, or chamber of commerce. These organizations should be able to refer you to business loan brokers who are reliable, responsible, and trustworthy.
On the other hand, however, considering the lack of regulations and the process involved with finding a good small business loan broker, you might ultimately determine that working with a marketplace like Fundera is a better option.
At the end of the day, whichever route you choose to find financing, you’ll want to be vigilant about protecting your rights, comparing all of your options, and only choosing the best loan product for your business.