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Should I use a business loan broker?
When hiring help to find business financing might be a good idea, plus red flags to watch out for.
As a small business owner, time is one of your most precious resources. And while you might need a loan to reach that next level, the time it takes to find a good deal can get, well, expensive. A good business loan broker can help you save the hours you’d spend finding a loan yourself and may be able to land you an offer you might not have found otherwise. But they aren’t free.
How exactly does getting a business loan through a broker work?
You might have hired a broker to find your home or help with your investments. A business loan broker works the same way. They’re professionals that help businesses find financing. Brokers work by bringing your business loan application to different lenders and coming back to you with potential offers. Once you agree to the loan, brokers often handle repayment. Throughout the whole process, your broker can also be a resource for any questions you have about business financing.
What are the costs?
Typically loan brokers charge you a percentage of your total loan amount after it’s funded. This can be as high as 7% to 17% with an online lender or as low as 1% to 3% with banks or credit unions. Often broker fees for finding an SBA loan are lower.
Some brokers charge this fee in the form of a higher interest rate. Once you make your repayment, they collect a percentage of the interest before giving the rest to the lender. Others ask you to pay up front.
How could working with a broker benefit me?
Working with a broker can have several benefits. First and foremost, it can save businesses the time and effort of researching and applying for multiple business loans. Since brokers are likely more experienced with business lending, they could know about options for your business that you wouldn’t have found on your own. Working with an experienced broker means they can smell a good deal — or a scam — from a mile away.
Sometimes it’s just good to have a middleman. Your broker can explain any unfamiliar concepts and keep you from dealing directly with your lender. It’s similar to hiring someone to do your taxes — they know all the tricks you’d need to pass the CPA exam to unearth.
Business loan broker vs. business loan marketplace
An online business marketplace is another resource for your small business to quickly get quotes from several business lenders. How does it work? First a business owner fills out an online form. After you submit the form, the marketplace uses an algorithm to find lenders you might qualify for.
Some lenders give you loan amount and rate quotes in a matter of seconds after a soft credit pull and running your information by its partner lenders. Others give your contact information to lenders so they can reach out to you.
Business loan marketplaces are different from brokers in three ways: They’re free to use, aren’t involved in repayment and are often faster than a broker. But they don’t offer specific advice to your business — though many provide educational resources.
|Application process||Give your broker the information they need to apply for a business loan for you. The broker takes care of everything except picking an offer and signing the paperwork.||Fill out a short online form yourself to get preapproved. Then follow the lender’s directions to apply yourself.|
|Cost||1%–17% of your loan amount.||Free for borrowers.|
|Typical turnaround time||Varies from a few days to a few weeks.||A few minutes to get an offer.|
A marketplace can help when you have a serious time crunch: You have an emergency cost or a short-lived opportunity that you need funds to take advantage of. Since it’s an automated process, you can make a decision in a matter of minutes and even have funding as soon as the next business day. And if you have some experience with business loans, a marketplace can help you save on those broker fees.
Should I apply with a direct lender by myself instead?
Sometimes it makes more sense to apply for business loans directly. Established businesses with well-documented revenue and a strong business plan are more likely to qualify with business lenders at favorable rates, so a broker’s services might not be worth the cost. Consider applying yourself if you have the time and resources to do some research and have some experience with lending.
But applying on your own might not make as much sense if you’re totally new to your business or business lending. Businesses that are young or have low revenue can have a difficult time finding competitive financing. You also might not be able to spot the right deal and may make rookie mistakes on your application. Plus, it can take more time to find the right loan for your business if you’re inexperienced.
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5 questions to ask when picking a business loan broker
A good broker can be great for a small business that needs help with the application process. But not all brokers have your best interest in mind. Here are some questions to ask your broker before you decide to work with them.
- How many lenders will see my application? The more, the better. If the broker tells you they have the perfect lender for you and there’s no need to shop around, hire some else.
- Do some lenders bring in more money than others? Often that’s the case. This is not a red flag on its own, but if you know up front which lenders land your broker the highest commission, then it’s easier to tell if your broker is looking out for your or its best interests when they present you offers.
- Will I know how much I’m paying in fees? Legit brokers are upfront about fees and tells you the cost of your loan before you agree to an offer.
- How much time will I have to decide? Your broker should give you a couple days to think it over. Avoid brokers that are pushy about getting a decision.
- Do you sell my information to third parties? With an online marketplace, you can read the terms and conditions to find out what it does with your name and contact information. With a broker, you can ask. If it does, you could end up fending off a tidal wave of calls and emails from companies trying to sell you something.
Red flags to watch out for
You might want to stay away from brokers with these telltale signs.
- No contact information online. If a broker doesn’t list an address or phone number, there’s a chance what they’re doing isn’t completely above board. Most legit business loan brokers list multiple ways for customers to get in touch with them.
- Guarantees you’ll get a loan. No broker can guarantee that you’ll find a loan through it services — this is often a sign of a scam.
- No credit check. Your broker needs to know your credit score to find a legitimate business loan. If it doesn’t run a credit check, this could be another sign that it’s a scam.
- No references or track record. If your broker can’t produce testimonials or contact information from former clients, then there’s a chance that their customers are less than happy with their services.
A loan broker could help your small business find a competitive business loan if you don’t have the time or experience to apply on your own. Brokers could also help if you’ve had trouble finding a lender that your business can qualify for. But be careful about who you choose to work with — some brokers don’t always have your best interest in mind.
Want to learn more about your business loan options? Check out our guide to business loans to discover how they work and compare lenders.
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