Should I Use a Broker For a Business Loan?
This is a question we’re starting to hear more and more from our readers, particularly with the growth of Business Loan Marketplaces such as Become and direct lenders such as Prospa providing direct competition to the traditional broker model.
What is a business loan broker? What sort of value can a broker add in the quest for seeking a business loan? How much will a broker cost? These are the questions we look to answer as well as ultimately seeking to conclude if a broker is a reliable partner for your business funding.
What is a Business Loan Broker?
A business loan broker performs a role just like a mortgage broker or indeed any other brokerage firm. They will act as a middle man between those seeking a loan and the loan providers.They’ll collect information on your business and with your approval apply to small business loan providers on your behalf.
What Benefits Can a Business Loan Broker Add?
Specialist knowledge and longstanding relationships
A good business loan broker should be able to guide business owners through the loan market and use their expertise and relationships they’ve built with lenders to recommended the most suitable loan providers to each business (including a bad credit business). They should have an awareness of which loan providers will be most likely to accept a business’ application and avoid unnecessarily contacting providers who are a bad match.
If, as a business owner, you’re only aware of a standard business loan and not sure what other products are out there such as invoice financing or a line of credit then a business loan broker should be able to add value in this respect too. Ensuring you receive the most suitable product for your business requirements.
Most importantly a good broker will speak to a much larger number of loan providers than perhaps you would do directly and save business owners precious time in applying to multiple loan providers themselves.
Work with both banks and designated loan providers
If you are keen to use a bank instead of the many specialist loan providers that are now found in Australia, then good brokers should have relationships with banks too. And will manage the more onerous bank application process on the business owners behalf.
“Better rates than going direct”
Theoretically, because the aggregated amount the business loan broker sources from banks is higher than just one sole application, they should be able to achieve a more favourable loan rate from the provider. What this doesn’t take into account of course is the costly fees the business loan broker will take themselves.
How Much Does a Business Loan Broker Cost?
Typically, a business loan broker will charge anywhere from 7-17% of the total value of the loan. A transparent broker should inform you of the interest rate provided by the loan provider and their markup too. If you’re in talks with a broker who seems reluctant to provide a breakdown of how their rate is calculated then its likely they’re looking to charge unreasonably high fees.
Most commonly the fee will be included in the cost of your business loan but sometimes you may have to pay the broker directly for their services too. Some commercial loan brokers only charge you if they have successfully secured your business a loan, whereas others will still charge a fee even if you they’re not able to successfully match you with a lender.
Can I Trust a Business Loan Broker?
Some of Australia’s best business loan companies have recently been named for their performance in 2019. With clients praising the variety and depth of financing options the brokers have been able to present to them. As an example one broker prepared a cost benefit analysis for their client when comparing over 20 different funding options.
However, it must be remembered, protection for SMEs with regards to small business loans, is less than that of the consumer protection offered with a personal loan. The ASIC is rather clear on this in a bid to better educate SMEs prior to taking out business loans. We then have to consider small business loan brokers are subject to even less regulation than loan providers themselves. Acting as a middleman between you and the lender you have to be sure the broker has your best interests at heart. Loan brokers will always have the motivation to maximise their own profits, so you have to be aware of this at all times. Each time they make a recommendation is it because it’s what’s best for your business or because it puts more money in their back pocket.
Inevitably brokers will also have various incentives put their way from lenders for continuing to push clients their way. If a broker is receiving better benefits from a particular lender they may recommend you go with that lender even if it’s not the best option for your business.
Perhaps most pertinently business owners should also be aware of the rise in scammers acting as small business loan brokers. The most popular con being the “advance fee scam.” A scammer pretending to be a loan broker will ask for an up-front processing fee. Often with the false pretense of 0% interest offers from a number of different providers to follow. Of course none of these do follow and once you pay the upfront fee you never hear from them again. You may have even shared important information on your business and bank account in the process.
The idea of using a broker will always bring the negative connotations with it that arguably it deserves. In a less regulated environment there will always be ‘sharks’ looking to do whatever they can for a quick buck. That doesn’t mean all business loan brokers are out there to get you, as the most successful brokers will always have their clients at front of mind in everything they do. But with expensive fees that could double the cost of your loan and the rise of free, verified and safe business loan marketplaces, it just doesn’t seem logical to work with a business loan broker until you’ve at least tried these free services first.