Financing a small business has never been an easy feat. The ideal scenario that all entrepreneurs dream of is having enough capital available to finance the business themselves. Unfortunately, this is rarely the case. Most small business owners need to find investors or get a business loan.
In 2021, financing a business is more difficult than ever. The past year and a half has been tough, and even well-established businesses are applying for loans just to survive. If you’re thinking of getting a business loan, you will want all the resources to find the best possible option.
There are tons of resources online. However, as someone new to the business loan industry, it is difficult to get down to the brass tacks from within all the information. For this reason, many small business owners turn to loan brokers when searching for financing.
Is it worth using a loan broker or are you better off finding a loan yourself? Let’s get into the reasons you may consider using a business loan broker before looking at the pros and cons.
What risks do I face when searching for a business loan?
In theory, you can go straight to your bank and apply for a loan. This way, you are getting financing from a regulated institution. There are consequences for them if they mislead you.
But banks are no longer the best option for most small business owners. In some cases, business owners won’t qualify for bank loans. In others, the slowness of the process is not worth the meagre terms offered.
The fact is that there are now many alternatives to bank loans. The private loan industry is booming, even after a year in which everyone struggled. Some companies, like Prospa in Australia, were even trusted with administering funds provided by the government for small business loans.
Private lenders offer a range of possibilities. No matter what type of business you own and no matter what type of success or failure you have seen in the past, there is a loan for you. Even better is the fact that you can apply for many private loans online, getting immediate approval and funds in your bank account within a few days.
However, this is actually where things get tricky.
An unregulated industry
The private loan industry is bound by certain consumer regulations. However, compared to public institutions and banks, these regulations are minimal. This means that companies can use manipulative means to get you to take out a loan. They can mislead you, if not outright lie, and you may end up with a loan you will never be able to pay off.
Within the private loans industry are many predatory companies, offering high interest rate loans to people who can’t find any other options. In some cases, these companies will make promises that, while technically true, will not lead to the success implied.
Choosing a loan provider would be easier if we could just list all the unscrupulous companies. The problem is that even though some companies are predatory across the board, most companies offer both worthwhile loans and loans that will probably bankrupt you. This is true of some of the most popular, trusted loan providers.
In short, when searching for a business loan, you are at risk of falling into a cycle of debt you may never escape. This is why you need to do your due diligence.
But where does this leave you? You will be asking yourself whether you should do the research yourself. Alternatively, should I use a business loan broker?
Should I use a business loan broker?
In theory, a business loan broker is exactly what you need to make the right decisions. A business loan broker knows all the ins and outs of the industry. They have a far better understanding of it than you ever will. They will be able to list your options within a couple of days, giving you the information you need to make an informed decision. This process would take you far longer, and you probably would not come up with nearly as much relevant information.
That being said, there are a number of reasons to avoid using a business loan broker. Let’s take a look at the biggest causes for concern as well as any counterpoints.
The downsides to business loan brokers
Using a business loan broker is not free. Far from it. They take anywhere from 7% to 17% of the total loan value. You get significantly less than you applied for while having to pay back the full amount.
Furthermore, just as the private loans industry is lacking regulation, loan brokers are not bound by much regulation either. They can be as predatory as the worst of the business loans companies. Considering that they receive commissions based on the amount of money you receive, they have incentive to get you the biggest loans possible rather than what is responsible for you.
It is also important to point out that business loan brokers are not as necessary as they once were. There are now websites and services which will find you the types of loans you are looking for in minutes, along with a side-by-side comparison of your best options. These services are cheaper and do not benefit from you making the irresponsible choice.
With this context, you may be thinking that using a business loan broker is a terrible idea. However, there are reasons to consider it.
The benefits of business loan brokers
Because the business loan broker is managing a number of loans, they are able to get better rates for you from the loan companies. This goes some way to offsetting the expense of using their service.
It is also possible to find some excellent brokers that you can trust. As long as you are reading and verifying the reviews and testimonials, you can come across business loan brokers who always have your best interests at heart.
The Human Touch
When you do find the right person, you are far better off than you would be with an automated service. They can take context into account in the way that algorithms cannot. Also, you can still do an online comparison and look for discrepancies in what your broker is telling you. If you have questions about what looks like a better loan, your broker will be able to explain any downsides you might have missed.
In conclusion: is a business loan broker worth it?
Whether or not you go with a business loan broker depends on how much you trust your own abilities to research and make the best decision. If you have a strong understanding of the industry and are able to spot scams and predatory loans, you have no need of a broker. However, if you are starting from scratch, you may well struggle to understand all the information available and you will not be able to make a truly informed decision.
A business loan broker will cost you a significant percentage of your loan, but they are worth it if you would otherwise walk right into a trap. As long as you do your due diligence on their reliability, you should be able to find a broker you trust.