Guide to Business Loan Brokers

A business loan broker connects business owners to lenders offering the type of loan they need. Also known as corporate loan brokers, they do not work exclusively with one bank or lender. Instead, they generally have connections with many.

Using a broker who knows the ins and outs of business loans can help a small business owner compare business loan rates and loan terms without individually applying to a multitude of lenders.

But how exactly do business loan brokers work? Will it cost you to use one? Is it better to do the legwork yourself?

Read on to learn the pros and cons of using a broker to get a small business loan.

What Is a Business Loan Broker?

A business loan broker (also called a commercial loan broker or corporate loan broker) is an agent who can help guide you through the sometimes intimidating project of applying for business loans. The broker does not approve the loan or provide the financing. Instead, their role is to help you navigate the application process, connect you with an appropriate lender, and act as a middle person between you and your lender for part or all of the loan transaction.

Brokers are knowledgeable about all kinds of financing options and have relationships with different types of lending partners. That expertise can put them in a good position to help you find the right type of financing for your business.

How Using a Business Loan Broker Works

Instead of applying directly to a lender, you provide your financial information to the broker, who then reviews your information to see what business loan requirements you meet and communicates with lenders on your behalf. If your broker receives offers, they present you with your options and you can choose the one you like best.

Sometimes a broker acts as a liaison between you and the lender until the loan is processed. Other times, you may complete the application directly through the lender.

Recommended: Minimum Credit Score for a Business Loan

How Much Does a Business Loan Broker Cost?

Some business loan brokers may charge fees to the borrower, such as a “success fee” for closing the loan or a small percentage of the approved loan amount.

In many cases, however, they get paid by the lender. There are no standardized or regulated commission rates, but most brokers charge lenders 1% to 3% of the loan amount.

Before you start working with a broker, it can be a good idea to discuss not only business loan terms for the funding, but also whether you will be required to pay the broker any fees.

6 Types of Business Loan Brokers

In many cases, small business loan brokers will focus on one type of financing or on a particular industry. Below are some of the different types of small business loan brokers that may be available to you.

1. SBA Loan Brokers

The U.S. Small Business Administration (SBA) backs certain loans you can get through traditional financial institutions like banks, credit unions, or online lenders. SBA loans have very specific requirements and, as a result, are known for being one of the more difficult types of loans to qualify and apply for.

An SBA loan broker can help simplify the process of both applying for and getting approved for an SBA-backed loan. They’ll know what qualifications you need to be approved for the different types of small business loans offered by the SBA, and they can walk you through the application process.

Recommended: SBA Loan Requirements

2. Startup Loan Brokers

When your business is new and doesn’t have an established credit history, it can be difficult to find small business loans you qualify for. This is where a startup loan broker can help.

This type of loan broker can help you identify short- and long-term loans for startups that your business is likely to qualify for. Just be aware that when you own a new business, lenders may require you to sign a personal guarantee and may even require collateral to secure the loan.

Recommended: Small Business Startup Loans

3. Commercial Loan Brokers

A commercial loan is essentially similar to a business loan but is usually intended for larger-scale financing, such as for real estate, infrastructure, or significant capital expenditures. Sometimes this type of loan is secured with collateral owned by the business, and sometimes it’s not — it all depends on the business and the loan product.

A commercial loan broker typically has extensive knowledge about a large variety of business loan types available to small business owners. If you have a few different financing needs and want to see a range of options, a commercial loan broker may help.

4. Equipment Financing Brokers

Whether you’re looking to lease or finance business equipment, a broker who specializes in equipment financing can help guide you toward the best option.

Even if you don’t have great credit or much credit history, an equipment financing broker can likely present you with options, such as an equipment loan that requires you to pay the loan back faster or use the equipment as collateral, or a sale-leaseback option.

5. Factoring Brokers

A factoring loan (sometimes called invoice financing) refers to a type of short-term financing where you use outstanding invoices from your clients as collateral for an upfront loan. You pay back the loan, plus interest and fees.

This is similar to invoice factoring, where you sell your invoices outright to a lender at a discount. The lender is then responsible for collecting on the bills.

A factoring broker works to steer businesses to the best factoring options on the market.

6. Merchant Cash Advance Broker

Merchant cash advances allow businesses that don’t have good credit to borrow money against future revenue. They allow you to get cash up front in return for a portion of your business’s future sales.

While merchant cash advances are not technically loans, they often come with short repayment periods and high interest rates. Therefore, it can be difficult to find one with terms that suit your budget and needs.

Pros and Cons of Business Loan Brokers

Here’s a snapshot look at the pros and cons of business loan brokers:

Pros of Business Loan Brokers	Cons of Business Loan Brokers
They can save borrowers time and energy.	Commission-based brokers might encourage borrowers to take out larger loans than they need.
They have extensive knowledge of the lending market.	They can’t give a guarantee that they are finding borrowers the best loan possible.

Pros

One of the key advantages of using a business loan broker is that it can be quicker and easier than applying to multiple lenders individually.

A broker may also be able to find you long-term business loans with better terms or introduce you to potential lenders you might not find on your own. And, you often won’t pay anything extra for their services, since many brokers earn a commission from the company that provides you with the financing.

Cons

There are also some potential downsides. One is that if a broker receives a commission on the loan from the lender, then the broker’s interests and lender’s interests are the same: They both benefit from getting clients to take out the largest amount possible for a loan. This could incentivize a broker to persuade a business to apply for a loan that is larger than the amount that they need.

A broker could also potentially favor certain lenders over others, perhaps because they earn a higher commission from those lenders.

And finally, if the broker charges the borrower for their services, it can end up being more costly to use a broker than to do the legwork yourself.

Business Loan Brokers vs Business Lenders

Business loan brokers don’t actually lend you money; they find you the best lender and help coordinate the business loan application process.

Business lenders, on the other hand, are institutions that loan out money directly from their own accounts to business owners.

Here’s a closer look at the differences between the two:

	Provides funding?	Compares loan options from other lenders?	Good for low- to no-credit borrowers?	Speeds up rate shopping?
Broker	No	Yes	Yes	Yes
Lender	Yes	No	Sometimes	No

Who Can Benefit From Using a Broker?

While you can find and apply for business loans on your own without the help of a broker, small business loan brokers offer a number of benefits that are worth considering. They can be especially helpful if you:

•   Are too busy to research financing options. A broker already has relationships established with lenders and can help you identify the best deal in less time than it would take on your own.

•   Need the money right away. A broker will likely know how to push your application through faster, enabling you to get access to cash sooner.

•   Are a new business owner or have never applied for a loan before. The expert guidance of a broker can assist you not only in understanding your funding options, but also in finding lenders (or funding solutions) you couldn’t have found on your own.

•   Have a poor credit score. A broker can often help you find lenders who are willing to work with someone with a subpar credit profile or extend bad credit business loans.

Questions to Ask Small Business Loan Brokers

Here are some key questions to ask when interviewing loan brokers.

Do They Have Experience in Your Industry?

It can be a good idea to choose a broker who understands your business and knows why you’re seeking outside capital. A broker with experience in your industry will likely be better able to explain why certain loan products are better for your business than others.

What Is the Total Cost of Their Service?

Most brokers receive payment through lenders, but some directly charge the borrower. While both have their pros and cons, it’s important to know what you’re getting into before you hire anyone.

Is There a Cooling Off Period?

Do you have a few days to withdraw from a contract? This can be helpful if the reason you are seeking financial assistance is due to a temporary problem (such as unpaid invoices) that may get resolved. It can also be beneficial if you are simultaneously applying for financing on your own and might receive a better offer elsewhere.

How Many Lenders Will They Find for You?

Generally, the more the better. Brokers who only work with a small handful of lenders aren’t really saving you much time, nor are they giving you a good snapshot of the market in terms of interest rates.

Where Did They Get Their Training?

A broker who has an extensive education and years of professional experience is generally a better choice than someone who simply became a broker by happenstance.

Do They Do In-House Underwriting?

Business loan brokers typically do not perform in-house underwriting. Instead, they connect borrowers with lenders and facilitate the application process, leaving underwriting to the respective financial institutions. However, brokers may work with you to gather and evaluate your information to assess how it may appear to underwriters.

How Quickly Do They Work?

The speed at which a business loan broker can secure a loan depends on the lender and loan type, ranging from 24 hours for short-term loans to several weeks for complex financing.

Alternatives to Business Loan Brokers

There are alternatives to working with a loan broker and even for seeking a traditional loan altogether, including:

Crowdfunding

Crowdfunding allows you to collect money for your business venture through an online platform. While there are different types, a common choice is donation crowdfunding, in which people can donate any amount, and the money you receive typically does not have to be paid back. If you are interested in this kind of crowdfunding, you would need to create a crowdfunding campaign, market your campaign, and set a deadline to meet your goals. The biggest drawbacks of crowdfunding are that it takes time to create your campaign, and you may not receive the amount of money you need.

Peer-to-Peer Lending

Like crowdfunding, peer-to-peer lending is also done through an online platform. However, this type of loan does need to be paid back. Peer-to-peer lending involves getting a loan from an individual investor or company as opposed to a bank or credit union. Funding times are typically quicker than with banks, and business owners with bad credit may be more likely to qualify. The downside is that interest rates and fees may be higher than they would be from a traditional lender.

Small Business Grants

Small business grants are awarded to business owners by governments, corporations, nonprofit organizations, and foundations. A huge advantage of small business grants is that they don’t have to be paid back. However, because of this, there are often a large number of applicants as well as strict qualification requirements. To find small business grants you may be eligible for, do a search for the industry you’re in followed by “grants.”

Find a Lender Yourself

There are many comparison websites online that can make it easy to compare loan products, so finding information isn’t difficult.

To get an accurate picture, you will likely need to know your credit score, as well as your business’s credit score (if any), annual revenue, and debt-to-income (DTI) ratio.

Recommended: Alternative Small Business Loans

The Takeaway

A business loan broker connects new and established companies with lenders who may want to work with them. If you don’t have the time to shop around or you’ve been turned down by multiple lenders, using a broker can be helpful.

If you work with a broker who earns a commission from the lender, it won’t cost you anything to use their services. The downside to this payment setup is that it can give brokers incentive to sell you larger loans or favor lenders who pay them a higher rate.

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FAQ

Where do you find small business loan brokers?

You can find small business loan brokers by performing an online search for loan brokers in your area. You can choose a few and talk to them about what they have to offer and how they can help your small business. You can also ask other small business owners if they have a loan broker they recommend.

Are there any upfront fees for a small business loan broker?

Upfront fees should not be charged by small business loan brokers. If one does charge a fee, that may be a red flag. Normally, brokers are paid by the lender when the loan closes. Some brokers may charge the borrower a fee directly after the loan is closed, but most will not charge fees up front.

Can small business loan brokers help if you have bad credit?

Yes, a small business loan broker can help you find a loan even if you have bad credit. They generally know a few lenders who work with borrowers with poor credit, and they can connect you to those lenders. However, they don’t have the power to eliminate higher interest rates you may face if you have problematic credit.

What is a business loan broker’s purpose?

A business loan broker’s purpose is to connect you, the borrower, to a lender that’s going to get you the best loan for your needs. Business loan brokers guide you through the entire process, from finding the right lender to filling out your application to receiving your funds.

How do I know if a business loan broker is legitimate?

Tipoffs can include a broker that wants to charge you upfront fees and has no physical location, but you can also check with your state’s secretary of state or similar office. Like any business, business loan brokers that are LLCs, corporations, or limited partnerships must register with the state, and a few states, like California and New York, require licenses. You can also check the Better Business Bureau to see if there are any complaints issued against a business loan broker.

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Photo credit: iStock/AmnajKhetsamtip

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