Many entrepreneurs attempt to avoid loan brokers when seeking financing for their companies. And, it is, in part, understandable given the bad reputation that many brokers have (especially in the business loan and commercial mortgage industry).

In most borrower's eyes, business loan brokers are simply middlemen between them and the actually lenders; middlemen who only seem to bring a new, increased layer of costs to the whole loan process - a real determent to businesses seeking outside financing which can be by itself a very expense endeavor in the first place.

Unfortunately though, many business lenders prefer to use loan brokers for two primary reasons:

Using loan brokers allow lenders to reduce their overall marketing expenses. Thus, they can focus more on creating and developing their loan programs to better meet business borrower needs as well as focus on their underwriting (which is what their business is really all about).

Most lenders, instead of creating and paying for their own marketing campaigns to include all the costs of tracking those results, increased marketing staff and the trail and error expenses of attempting to correctly target their perceived potential customers (as we all know marketing can be hit and miss and if you miss, you have nothing to show for the wasted expense), prefer to use brokers and allow those referrers to leverage their marketing efforts to drive business to the actual lender. In turn, these brokers either arrange their own fees with the potential borrowers or receive a cut of the fees that the actual lender charges.

Lenders also prefer loan brokers as they provide an additional level of filtering applicants. In speaking with several lenders in the unsecured business loan industry, it seems that only 1 in 10 applicants will actually qualify for a business loan product. Thus, these lenders have to spend both time and effort in pre-screening potential applicants which can really increase their overall costs - Keep in mind that as their costs go up, so does the costs to the potential borrower as all costs get past on - thus, most lenders choose to let loan brokers filter and pre-qualify potential clients.

But, brokers can also provide a bit of value to busy business owners. Contacting a broker who has many contacts within the industry can not only save the business owner time (and time is money) but can help a business owner determine and identify which products and which lenders may be best for their business - products or companies that many business owners may not know about.

Plus, brokers can do much of the leg work for the business owners - freeing the owner's time to continue to focus on running and growing their business. The trade off and potential cost saving is a balance between the increased fees or increases costs of using a business loan broker and the expense (expense of the owners time) of being drawn away from the business and finding and dealing with lenders on their own.

Most business loan brokers are honest, hard working individuals who actually desire to help businesses find the capital they needs to grow and succeed.

Further, many fo these brokers understand the long-term relationship - if they treat you and your business right the first time, you will continue to return to them for all your future financing or capital needs.

But, like most industries today, there are always bad apples.

When seeking to hire a loan broker, here are five questions you should keep in mind before you sign any contract, pass along any business financial information or pay any fees:

  • Ask for references then actually follow up with those provided. Now, keep in mind that most brokers will pass along their best references which can be a bit misleading. So, either try to find a few other companies that have used the broker in the past or ask the list of references if they know of other businesses who have used that broker. Moreover, businesses should attempt to do background checks, not only on the broker, but on the lender(s) the broker refers your business to. Some simple checks can include doing a web search for reviews or scams on the lender or broker, checking in with the better business bureau (both nationally and in the local market the broker or lender operates in) and sign up on business forums and ask other business owners there (member on the forum) if they ever had any positive or negative dealing with that broker or lender.
  • Ask the broker what your business could reasonably expect and then try to get that in writing. The key here is to listen. Listen to what is being said and to your own instincts. If you have any doubt or simply think that the offer is too good to be true, then walk away.
  • Ask about the time it will take for your business to actually receive funding. Most business owners seeking capital usually need funds immediately - not four or five months down the road. This will not only allow your business to judge the worthiness of the broker but to also impress upon them your time frame requirements - remember, you are actually hiring them and should expect results that meet your needs and not theirs.
  • Ask about costs - not just the fees involved but the different overall costs that are involved with different business loan products. For example, most secured or unsecured business loans are pretty straight forward given a stated annual interest rate. But, other products, like account receivable factoring or business cash advances, are not require to state their rates like traditional business loans. Thus, a 5% rate for an advance against your business's invoices may actually cost much more than a traditional term loan over the same period. If the broker cannot reasonably explain the financing costs to you in terms that are easily understood, then the broker may not have a very firm grasp on the products that they are brokering on your behalf.
  • And, lastly, fees. Ask if they require a fee from your business or will they receive their payment from the lender? Will these fees, especially if from your business, be required upfront or when the loan is actually funded?

Having upfront fees is now becoming, unfortunately, the norm in this industry - in part due to the financial turmoil in our economy but also because many brokers want to weed out the looky loos and only deal with serious businesses. Keep this in mind, an upfront fee is OK as long as it is accompanied with some sort of guarantee - like being refunded if the broker cannot obtain your business the agreed upon amount of funding or offset against other broker or lender fees when funding does occur.

Also, it is always beneficial to spend some time researching the many different products that are available to new or growing businesses. This way, you can better evaluate the broker's recommendation. For example, you would rather have a broker recommend and pursue a loan product that is best for your company and not simply the best for the broker (providing the broker the greatest fee without a matching benefit to your business) and you will only know this if you understand the types of loan or capital products that are available.

There are many online web sites that can help you better understand the products available to your business - Business Money Today - is one such site which provides both information and resources on the plethora of financial and capital products available to any business in any stage of its development.

While brokers may be just middlemen, they are also becoming more prominent in this industry and a new link in the financial chain that appears to be here to stay. But, brokers do not have to be an Achilles heel for your business when seeking capital if you and your business focus on using them to your advantage. If you can pull this off using the tips outlined above, brokers may actually be worth using as they then become the eyes, ears and legs for your business during your capital funding pursuit - allowing you, the business owner, to continue building the profitable business you have always dreamed of.