Using Loan Brokers, Is It Worth It?
by Joseph Lizio - February 22, 2010
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.
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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.
Continued On Next Page: Tips and Questions to Ask your Broker!
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Using Loan Brokers, Is It Worth It? - Business Money Today