Navigating the waters of small business financing can not only be tricky, but time consuming. That being said, some business owners decide to use the services of a broker to help them with the process.
If you decide to go that route, you'll want to make sure you're working with the right person who has your best interest at heart. Here’s what to ask to make sure you're working with the right broker.
1. Are you a direct lender or a broker?
This may seem like a crazy question to have to ask, but some brokers try to pass themselves off as the ones actually making the loan rather than as a middleman.
Using a middleman to help you through the process isn’t a bad thing, but you should know exactly who you're dealing with if not the lender directly. Why? A broker will charge you an extra fee or commission, that adds to the cost of the loan.
2. How much will it cost to use your services?
Most brokers make money by adding a percentage (or “points”) onto the rate they can get you from a lender. If you’re willing to pay for the service they provide, a few points might be acceptable, but in this largely unregulated industry, brokers can (and do) add as much as they’d like. Make sure you know how much extra you’re being charged.
3. How many banks or other lenders will you approach on my behalf?
The main benefit of using a broker is they do the legwork for you, getting your application seen by as many people as possible and, ideally, getting lenders to compete for your business so you can get the lowest possible rate. A broker that doesn’t have relationships with an array of potential funders is likely a salesperson in disguise.
4. Will you present all the options available to me?
Frankly, the incentive for many brokers is simply to make as much money as they can. They do this by offering the highest priced options, not necessarily the ones that are in your best interest. Make sure your broker presents you with multiple offers that you can compare.
5. What is the APR on the loans you're offering?
As we’ve discussed previously, understanding the annual percentage rate (APR) for a loan is the best way to make comparisons. If you don’t get the loan terms in writing with the APR clearly stated, you'll have no way to judge whether this is a good deal for you or not.
6. What are the terms on the loans you're offering?
The APR isn’t the only important thing to know. You need to see and understand ALL of the terms being offered, such as how and when the loan is to be repaid, the time period it will cover, and its total cost (including the broker’s commission).
7. What other fees might I be hit with?
Even when you understand the interest rate and terms, some lenders can still tack on fees, penalties, and other unexpected charges, resulting in a much higher price than you originally thought.
Some borrowers find themselves in a cycle of debt, borrowing more to pay back their loans, because they didn’t understand all the potential costs up front. Make sure this doesn’t happen to you; scrutinize the fine print.
8. What will you do with my information?
Another way many brokers make money is by selling your information to others. These days, data = dollars. As a small business owner, you’re worth money as a prospect to everybody including office equipment dealers, commercial realtors, financial planners and insurance agencies. Get an assurance your information will be kept private and secure.
9. May I see some references, please?
You wouldn’t even hire a lawn service without properly checking them out, and you definitely shouldn’t engage a loan broker without proper scrutiny. Get the names of several clients they’ve worked for, and find out what the process was like and if they were satisfied.
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