Business Loan Brokers: Do You Need One?
Loan brokers act as an intermediary between you and lenders, doing research and shopping for funding on your behalf — which could potentially save you time and money.
But not all business loan brokers have borrowers’ best interests in mind. Brokers charge fees and commission for their services and they may be incentivized to push you toward pricey loans. Before hiring a broker, do your research to avoid falling prey to unsavory practices.
What is a business loan broker?
A business loan broker is an independent agent who shops for business financing on behalf of business owners. Think of the broker as a matchmaker who connects business owners with potential loans. The right broker can shorten the timeline to funding — and help entrepreneurs secure the capital they need.
Brokers are intermediaries between business owners and banks, credit unions, alternative, online lenders and peer-to-peer lending platforms. A skilled broker can leverage their relationships to get their clients in front of the right lenders. That could lead to favorable rates and terms if they qualify. But their efforts come at a cost.
Business loan brokers vs. loan marketplaces
Online loan marketplaces, like LendingTree, serve some of the same functions as business brokers, but they aren’t quite the same thing. Both can connect small business owners with financing options.
Most business loan marketplaces will collect some basic information about what the borrower is looking for, then match them to lenders in their network who might be a good fit. That can take some of the leg work out of finding a business loan — and it’s typically free.
Brokers offer a higher level of attention, but charge a premium for their services and offer a more customized experience.
| Business loan broker | Business loan marketplace | Applying to individual lenders | |
|---|---|---|---|
| Cost | It depends on the broker’s fee structure. Some might charge an upfront fee, plus a percentage of the loan amount, such as 1% to 3%. | It’s typically free for small business owners, but you’ll still need to pay any fees charged directly by the lenders if you get a loan. | Some lenders tack on loan fees, so be sure to read the fine print before making a decision. |
| Time | A broker can research lenders and loans for you, which can shorten the application process. | Completing a loan request is usually quick, but if you find a lender you like, you’ll need to complete a formal application with them to receive funding. | Researching lenders yourself and shopping around can take time and delay funding. |
| How it works | The broker considers your funding needs and then taps their network of lenders. Some will help you complete and submit your loan application. | You complete a loan request, then the platform connects you with potential lenders. | You research lenders and loans, then apply for the one that best fits your financial needs. |
| Impact on credit score | Most brokers do a soft credit pull, which does not affect your credit. However, the lender will run a hard credit inquiry during the official application process. | You can expect a soft credit inquiry to get matched with lenders, then a hard credit pull when you apply for financing. | Business loan lenders will check your credit before approving a loan application. |
Pros and cons of hiring a broker
Understanding the benefits and drawbacks can help you decide if working with a broker makes sense for your business.
| Pros | Cons |
|---|---|
Speed: A broker can usually research lenders and products faster than you could on your own. Affordable financing: Brokers could leverage their connections with lenders to secure low-cost funding for your business. Access to a suite of products: You may think you’re limited to one funding option, like a traditional term loan, but a broker may find that another type of financing — like an equipment loan or business line of credit — would better match your needs. | Fees: Brokers charge a fee for their service, which might be steep. That’s on top of the debt you take on. Unclear rates: You may need to push a broker to be transparent about the total cost of financing, including the lender’s rates, fees and penalties — especially if they’re promoting an expensive product like a merchant cash advance where repayment amounts may fluctuate. No guaranteed approval: Whether or not you qualify for a broker’s suggested financing will ultimately be up to the lender. |
Cost of using a business loan broker
Loan broker fees can add up fast. They usually make money by charging a fee that’s equal to a percentage of the total loan amount, such as 1% to 3%. Every broker is different, and fees can range depending on loan size and term length, but a questionable broker could be motivated to guide you toward a more expensive small business loan.
Some brokers might also charge an upfront fee to work with them. Make sure you fully understand a broker’s fee schedule before you start working with them.
Red flags to watch for in a broker
Before hiring a business loan broker, consider these factors to decide if they’re reputable.
- Upfront fees. If a broker charges upfront fees for their service, regardless of whether or not you secure financing, that should raise suspicion.
- Pushy sales tactics. If a broker pushes you toward loans or merchant cash advances with high interest rates, you may want to proceed with caution. A worthwhile broker should give you a range of financing options that you can afford.
- Being rushed to make a decision. You should be given a few days to make a decision after your broker presents loan options. If a broker pushes you to make a quick choice, they may be more concerned with the sale than whether you make the right decision for your business.
- Bad (or no) reviews. It goes without saying that negative reviews are cause for concern. Vet any broker carefully.
- Difficult to contact. You should expect an open line of communication between yourself and your loan broker. If they’re erratic or slow to respond, it could spell trouble.
How to hire a business loan broker
Consider the following steps if you’re researching business loan brokers.
- Clarify your funding needs. What do you need financing for? And how much are you seeking?
- Check your credit. That includes your personal credit, which can play an important role when seeking a small business loan.
- Compare brokers. Ask around your professional network and research online to find reputable brokers with good reviews — and only consider licensed loan brokers.
- Understand how their fees work. Once you’ve found some potential brokers, ask them to clarify their fee structure. If they’re dodgy about answering, that’s a definite red flag. Also ask yourself if you can afford their fees.
- Get clear on the process. Contact the broker to learn more about what they offer. For example, what level of assistance will the broker offer? And what can you expect in terms of the process?
- Read the fine print. Finally, before committing to a broker, make sure you understand all of the fees and what your options are if you want to change your mind.