As an entrepreneur, you’re probably well aware of the impact that external capital can have on a small business or start-up.
Sure, given enough time and energy, you might be able to bootstrap your business onto the market or into a revenue-positive position. However, in most cases, an external source of financing is what’s needed to establish a stable position in your target market, thereby giving your business the financial breathing room to test and refine product/service proof of concepts.
If your start-up or small business provides services or develops products within an advanced sector of the economy, you might have a chance at securing financing via the technology-driven world of business incubators, angel investing, and venture capitalism. However, in addition to being notoriously competitive, obtaining business capital from private equity investors is a time-consuming and high-stress process, two of the last things an entrepreneur needs in the early stages of their company’s development.
Even if you do manage to negotiate a business financing deal, the cutthroat world of private, commercialized financing will often leave your company sapped of equity and straddled with third-party partnerships or suffocating levels of management supervision.
Luckily, there are ways of acquiring business financing that don’t involve undesirable deals with equity investors. One of the most common methods of procuring business or start-up financing is through a business loan broker. Unfortunately, business loan brokers aren’t necessarily great options for entrepreneurs across the board. Depending on your business or entrepreneurial goals, you may find that a standard loan application is a more suitable financing option.
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What is a Business Loan Broker?
Business loan brokers share many characteristics with mortgage loan brokers. Put simply, business loan brokers act as the middle man between you, the business owner looking for financing, and a wide array of local and national business loan providers.
Because of their experience in the industry, business loan brokers will usually have a rough idea of business loan eligibility requirements across different loan providers. With this information, business owners are less likely to waste their time sending futile loan applications. If you’re looking for low-cost rates on a specialized business loan, a business loan broker can also leverage their longstanding relationships with loan providers to access more favorable loan conditions or discounted interest rates.
Why Not Apply Directly to Small Business Lenders?
If you want to finance your business without the help of a middle man, you can easily deal with small business lenders directly. To kick-start this process, you’ll need to go online and start completing business loan applications. In addition to meeting all eligibility and collateral requirements, successful business loan applications typically include the following documents:
- Management resumes.
- Personal and business tax returns.
- A comprehensive business plan.
- Business license.
- Commercial lease.
- Business credit report.
- Accounts receivable and accounts payable report.
- Any third-party business contracts.
3 Things Entrepreneurs Should Consider When Applying for Broker or Lender Financing
To avoid getting bogged down in the minutiae of loan agreements, most entrepreneurs just want to know what the optimum route is to flexible, cost-effective, and safe business financing. To determine the most optimal financing option, entrepreneurs will need consider the following three questions.
1. Are You Actually Saving Money by Going Through a Loan Broker?
While it’s true that loan brokers can negotiate lower financing rates, this benefit typically comes at the cost of a hefty brokerage fee. According to aggregated industry data, business loan brokerage fees range from 7% to a whopping 17% of the loan’s total value. To save yourself from getting ripped off, make sure your loan broker discloses their brokerage fee and their markup atop the loan provider’s initial interest rate.
2. Can You Trust a Loan Broker Over a Direct Lender?
Another consideration for entrepreneurs is that — in comparison to personal loans — financing for small and medium-sized enterprises typically comes with less regulatory protections. As a result, regulatory oversight towards the loan broker industry is generally quite lax. Remember, this doesn’t mean that all loan brokers are scammers. It simply means that entrepreneurs should take reasonable precautions when dealing with lesser-known loan brokers.
3. What Type of Financing Product Do You Need?
With the right personal or business credit score, entrepreneurs can choose from a wide range of business financing products, including high-interest cash advances, one-time lump sum loans, fixed-interest equity loans, or variable-rate lines of credit.
In most cases, working with a loan broker is only cost-effective if you, the business owner, are looking for a more affordable interest rate on an exotic loan product. If you’re just applying for a standard business loan, you’ll usually be better off working directly with a reputable lender.
Key Takeaways
When it comes to small business financing, the two most important things to remember are: 1) minimize your leverage and repayments; and 2) retain control over your company’s majority ownership stake.
The last thing any entrepreneur wants is to impair the long-term growth of their company by committing to a poorly thought-out financing agreement. As long as you do your due diligence, it shouldn’t really matter whether you go to a lender or business loan broker. However, as a rule of thumb, the general consensus amongst entrepreneurs is that business loan brokers are rarely worth their added cost in fees.
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