A business loan broker acts as an intermediary between a borrower and a lender to help secure business financing. Essentially, a broker utilizes your financing application to research and pair you with financing options applicable to your needs. With this, you can save time and money when shopping around for a lender. It’s worth noting that some brokers charge various fees in exchange for their services.
What is the purpose of a business loan broker?
The purpose of a business loan broker is to leverage relationships with their lending partners to match qualifying borrowers to various financing opportunities. Its services act to help you find the best funding options and negotiate the best rates and terms. Usually, brokers are experienced and can assist with processing applications, comparing lenders, and securing financing.
Types of business loan brokers
There are various types of loan brokers. Some specialize in certain financing options, whereas others may have a long list of financing types to choose from. It really depends on their lending networks and the type of financing you need.
Common types include
- Commercial loan brokers
- SBA loan brokers
- Equipment financing brokers
- Startup loan brokers
- Franchise loan brokers
- Merchant cash advance brokers
Pros and cons of hiring a business loan broker
| Pros | Cons |
|---|---|
| Can save time with a single application | May have to pay broker and other fees that apply |
| Can compare multiple lending options at once | Aren't working with a direct lender |
| Gain access to experienced lending specialists | Don't have a guarantee of financing approval |
Business loan broker costs
The total cost of utilizing a business loan broker can vary greatly. However, it’s common to expect a broker fee of 1% to 3% of the total loan amount for most transactions, but this can be influenced by factors such as loan amount and loan term.
Brokers are generally paid through a variety of fees, imposed on both the borrower and the associated lender. This can include referral, success, and interest fees. Be sure to confirm the broker’s fee schedule before using any of its services.
How to find a business loan broker
Brokers can commonly be found by researching various platforms and can vary widely based on the type of financing you seek, whether it be SBA, commercial real estate, or startup loans. To find one best suited for your business needs and qualifications, start shopping around by prioritizing your financing needs, budget, and qualifications.
Choosing the right business loan broker for your business
The process for choosing a business loan broker is as follows:
- Step 1: Determine your business financing needs. Consider what your business needs financing for. Include the amount, your budget, and how long you need funds for.
- Step 2: Compare brokers. Shop around with various brokers before submitting an application. Ensure they offer the specific type of financing you need, have clear terms, and good reviews from other borrowers.
- Step 3: Understand fees and expectations. Be sure to clarify all fees and conditions upfront before applying. Brokers will have various fees and expectations associated with facilitating a transaction.
- Step 4: Clarify the process. Keep in mind that brokers are not direct lenders. Instead, they work with partners in their lending network and act as an intermediary between you and the provider. Ensure you understand which party is responsible for which process.
- Step 5: Read the fine print. Make sure to reference the terms, fees, and conditions associated with the type of financing you need before entering into an agreement.
Alternatives to using a business loan broker
If you decide that a loan broker isn’t the best fit for your business financing needs, there are a few alternatives you can consider.
- Rollover for Business Startups (ROBS): If you’re looking to utilize your own funds, a ROBS allows you to access your retirement savings to fund your business tax- and penalty-free. However, you’ll typically need a minimum investment of $50,000. To learn more, read our ROBS ultimate guide.
- Direct lender: You can go directly to a bank or other lending institution if you are uninterested in paying broker fees or simply want a specific product or service from another source. Check out our guide on the best small business loans for some options.
- Friends and family loan: If you want to avoid a broker or lender altogether, you can approach friends and family for a less formal financing source. You’ll still need to apply an applicable federal rate to comply with tax rules and regulations, but this can be an easier way to obtain financing outside of a lending institution. Our article on raising money from friends and family provides more guidance.
Frequently asked questions (FAQs)
Generally, using a loan broker involves submitting an application and working with a specialist to determine your funding needs and to pair you with an applicable provider. Once you’ve been matched, you’ll work with the broker to facilitate financing through the lender.
Brokers make money through fees or commissions in exchange for their services. Fees can be imposed on both the borrower and the lender, although commissions are strictly through the lender.
When acting as an intermediary, brokers should charge fairly for their services and be communicative and honest with their clients throughout the whole process. You should avoid brokers that have unclear fees, have slow response times, and claim to guarantee financing.
Bottom line
If you choose to work with a business loan broker, it’s important to consider the various elements involved with using its services. It can be a great fit if you’re looking to save time and compare multiple lenders at once, although you should ensure that this is the best option for your business needs when seeking financing.
