As many small-business owners know, it can be a challenge to get a small-business loan–especially if you’re just starting out, or if your business is quite small. Such businesses make a huge difference in the American economy, employing more than half of the working class in the United States and bringing innovation to the marketplace, especially in the regions of science and engineering. However, they rarely get the loans they need.
One of the most important choices a business leader will have to make when considering applying for business loans is whether they prefer to get their loan by working with a broker or with a lender directly. There are pros and cons to each, and so let’s review to help you prepare for a final decision.
Since the odds are already stacked against small businesses getting loans, it can be worthwhile to consider hiring a broker. If a business has only existed for a year, for example, and there hasn’t been much time to build up a line of credit, then a broker may simplify the entire process.
After all, a commercial loan broker will be able to save a small-business owner a lot of time and hassle. When a business leader is first applying for a loan, if doing it on their own, they’ll have to research all the different possible lenders. They will also have to understand their business needs and the terms of their lender options, and compare and negotiate with lenders.
Furthermore, if there’s anything wrong with the first-time application, a lender can use this as an excuse to immediately reject the application.
However, one of the biggest problems to be aware of when it comes to hiring a commercial loan broker is that they may not always have their clients’ interests in mind. Unfortunately, the small-business lending world is a rather unregulated market, which means that it can be easy for brokers to make a large amount of money from their business while not necessarily getting the best loans for their clients.
In order to avoid this problem, small-business leaders should ensure that they get clear answers immediately for these three questions: (1) How much will the loan cost me? (2) How many lenders are you shopping my loan to? (3) Do you make more money by working with certain lenders?
The answers to these questions should be, simply: (1) Interest rate and APR should be what you’re paying, and only small fees on top of that–usually 1-3% of the total value of the loan. (2) As many as possible. (3) No. If the answer is yes, it should be something that doesn’t bias the shopping-around process.
The pros of working with lenders directly are most often evident when the small business has previously applied for loans. After all, if a business leader has already gone through the process once, and understands it, there is no need to pay a broker’s fees. The process should be much simpler than the first time around.
Additionally, lenders provide their own version of brokers–loan officers–who can help a small-business owner during the process. Of course, these loan officers receive a commission for the loans they get, so it’s important to connect with several of them, not only one.
When it comes to the cons of working with lenders, there’s really only one: a small business may not have all the information they need to get the best deal. Or, worse, they may be so uninformed that they are unable to get a loan accepted by any lender, which means that they have wasted a great deal of time and potential income.
For a small-business owner deciding whether to work with a broker, the choice depends mostly on what they feel most comfortable with and how long they’ve been running their business. As long as they have all the information they need, they should be prepared to make the decision that works best for them. If you have any additional questions regarding the value of working with brokers or lenders for your business, reach out to the Currency team for personalize guidance.