A commercial loan broker plays an advisory role by helping business owners navigate the complexities of the lending industry. Their role is to find the right business financing option at the lowest possible cost to the borrower.
But just as there are unscrupulous lenders, there are predatory business loan brokers. So, it’s advised that business owners perform a due diligence on both lenders and brokers before signing their name to an agreement. Below we discuss the advantages and disadvantages in hiring a commercial loan broker and some ‘red flags’ to watch out for.
What is a Commercial Loan Broker?
Business loan brokers act as intermediaries between borrowers and lenders for a fee. Owners and executives of small- and medium-sized companies often play an integral operational role and have little time to source and negotiate business financing. Hiring an intermediary with multiple contacts in the lending industry can speed up the process enabling the executive to focus on profit-generating activities.
Typically, a potential borrower submits an application to a loan broker who will perform a “soft credit” inquiry on the company. With the results in hand, the broker will present the loan application to their lender network to solicit business financing proposals. The borrower then consults with the broker to choose the best possible funding option.
The benefits here are three-fold.
One, the executive saves time by submitting one application to the broker rather than multiple applications to various lenders.
Two, a competent loan broker will know which lenders to contact based on each companies’ financial situation.
Three, one soft credit check has no impact on the company’s credit score where multiple hard checks can reduce the rating.
Do I Need to Hire a Commercial Loan Broker?
No, there are no universal needs for engaging with a business financing broker. A competent businessperson can sort through lending options or delegate to a trusted employee.
Companies with a strong FICO score (740 to 850) and several years of longevity will generally approach their bank for business loans. It’s likely to be approved and at a reasonable interest rate. At most, the borrower will call a few other banks to seek a better deal, but it’s a relatively straightforward process.
Other companies aren’t as fortunate. For some, the start-up phase may have left them with a less than stellar credit rating. For others, they don’t have the longevity to qualify for a bank loan.
The following are situations that may cause business owners to consider hiring a commercial loan broker.
Your company has been denied a commercial bank loan. Before a company even considers the services of a loan broker, they should apply to their bank for a business loan. If denied, the company then needs to explore a wide variety of business financing solutions. A loan broker can help sort through the options.
Your company has a poor to bad credit score. Businesses with FICO scores from 300 to 669 are generally considered to be subprime borrowers. Banks are not likely to issue a business loan unless there is substantial collateral. A loan broker can help find an assortment of alternative business lenders.
Your company is a fairly new enterprise. Traditional business lenders like banks prefer to approve loans to low-risk companies. Those that have been in business for several years have demonstrated their ability to succeed and are considered lower risk. A commercial loan broker can help source business lenders who will consider financing companies with at least one year of operations.
Your company is considered a high-risk industry. High-risk industries vary among business lenders, but there are several characteristics that may result in credit denial from traditional banks. Examples include:
Finally, a company may find itself without the time or expertise in-house and seeks an outside professional for assistance.
Alternative options to hiring a loan broker are consultations with a trusted accountant or lawyer. They can steer the company in the right direction and possibly refer a finance professional that can assist in securing a business loan. Alternatively, you can search for a commercial lender that specializes in high-risk industries.
Advantages of Business Loan Brokers
Business owners considering the engagement of a loan broker have likely been turned down for a business loan from their bank. Now they’re faced with researching, sourcing, and negotiating business loans themselves or delegating it to a finance professional. There are advantages and disadvantages to hiring a commercial loan broker as discussed below:
Saves Time – Entrepreneurs already have an excess of responsibility in steering their company to success. If there is no one internally that is capable for the task, an executive may outsource to a professional loan broker to save time.
Acts as an Advisor and Educator – A quality business loan broker will help owners understand the complexities of different commercial financing alternatives. Executives can use the gained knowledge in future commercial lending inquiries.
Has a Large Business Lender Network – By hiring a commercial loan broker, the company gains access to the agent’s lender rolodex.
Knows How to Negotiate Terms – An experienced loan broker will have an idea on expected loan terms from the company’s application and soft credit check. The business loan agent will negotiate more favorable terms from their network of lenders to get the best deal.
Can be Helpful to New Business Owners – Newbies may not have enough experience in a financial setting to find the best commercial loan option. A quality business loan agent will have access to lenders who specialize in financing new businesses.
Disadvantages of Business Loan Brokers
No Educational Requirements to Become a Commercial Loan Broker – There are no college or finance degrees required for becoming a loan broker. You’ll need to do due diligence on each loan broker considered to ensure they have the requisite skills in commercial finance.
Most U.S. Business Loan Agents aren’t Licensed – Most states don’t require a license for commercial loan brokers. This leads to predatory agents entering the field due to a lack of licensing regulations. This makes it doubly important to thoroughly vet brokers under consideration.
Excessive Fees and Interest can Drive Up Costs – It’s important to understand how the broker charges for their services before engagement. Make sure there are no hidden fees in the contract. A reputable commercial loan agent is paid a percentage by the lender, not the borrower. Absolutely never pay an upfront fee to a broker.
Proprietary Information can be at Risk – Due to a lack of licensing and regulatory control, a company’s confidential information may be at risk. To apply for a commercial loan, a company needs to submit financial statements, bank statements, tax returns, and strategic plan to the agent. Again, due diligence in the vetting process is important and a Non-Disclosure Agreement (NDA) can help mitigate risk.
Potential to Harm Company FICO Score – Multiple ‘hard-credit checks’ can negatively impact credit scores. Most alternative commercial lenders perform a soft credit check before they submit a proposal and a hard credit check after the borrower agrees to the loan terms. Make sure you’re not getting multiple hard credit inquiries in the initial stages.
How Much Does a Loan Broker Cost?
The cost of a commercial loan broker varies widely. Broker fees are typically a percentage of the business loan amount. Commissions can be as low as 0.5% and up to 20% at the high end. Typical rates are in the 1 – 5% range. In most cases, the lender pays the fee to the broker in exchange for referring the borrow to the lender.
In some cases, a loan broker will increase the interest rate on the loan with the lender paying the difference back to the agent. This increases the company’s cost over the duration of the loan. Demand full disclosure of fees and commissions and if you remain in doubt, move on to another agent or take on the task internally.
Business loans are typically larger than personal loans and the application process is done quickly online. So, an agent that wants to charge 10% or more on the value of the loan should be avoided. A 5% fee on a $100,000 loan equals $5,000. Not bad for what amounts to a day’s work. Be wary of high commissions.
Questions to Ask a Commercial Loan Broker
- How many lenders will you send my application to?
It’s important for your commercial loan application to get wide exposure to ensure getting the best deal possible. If the broker tries to steer you toward one or two lenders, it may indicate that the agent receives higher commissions from them. Demand high exposure.
- Can I have full disclosure of all fees and commissions?
Demand a complete breakdown of all charges.
- Do you receive a commission from the lender?
In many cases the lending institution pays a referral commission to the loan broker. If the combined charges are excessive, it may be a red flag. Another red flag is upfront fees. Commissions should only be paid on a successful loan.
- How secure is my company information?
Predatory commercial loan brokers may be inclined to sell your information to a third party. Have the agent sign a Non-Disclosure Agreement.
- What education and industry experience do you have?
You want to be sure they have a business finance education and/or experience in the loan industry.
- What references do you have?
Preferably, you want references from business leaders in your geographic area where reputation is important. If the commercial loan agent only has long-distance referrals, be wary.
Types of Commercial Loan Brokers
Final Words on Business Loan Brokers
Commercial loan brokers can be helpful for companies who have been turned down for traditional bank financing. Or who lack the time or in-house financial expertise. But finding a reputable broker may be just as time consuming as finding a commercial lender. Because loan brokers have little to no regulation or licensure, it’s a profession that can attract predatory operators. Extensive due diligence is advised and watch out for the red flags we’ve discussed.
Before hiring a commercial loan broker, speak to trusted advisors and business associates and ask for referrals. The loan officer at the bank that rejected your application may know a respected professional in business financing. Your accountant or lawyer can offer useful advice and referrals. Paying your accountant or lawyer to spearhead the business financing process can be a more affordable and trustworthy option.