This is a guest post by Meredith Wood, Head of Content and Editor-in-Chief at Fundera.
There are multiple loan products available to entrepreneurs who need additional funding for their small businesses. But having to figure out what loans you qualify for and compare each choice against the others can be time consuming and difficult. After all, you’re already busy running your company.
Instead of spending your time sifting through the many lenders and the loans each offers, small business owners can work with loan brokers who will do the grunt work for them. This way, they can spend their time where it’s needed—growing their businesses.
While there are many honest loan brokers who want to help small business owners, there are a handful in the mix who are just out for money. Here’s what you need to know about finding a trustworthy small business loan broker to partner with—and how you can avoid the wolves in sheep’s clothing.
When you choose to work with a loan broker, you’re trusting them to find the best loan for you and your business at the best rate. They are the middle man between you and your potential lenders, and for their help they typically get a percent of the total value of your loan, which is paid by the lenders themselves.
But what may come as a surprise to you is that loan brokers aren’t subject to any state or federal regulation. In fact, only a handful of states even require their brokers to obtain a license. This lack of regulation, unfortunately, means that there’s no limit on how much a broker can charge you for a loan, and even worse, they’re not obligated to tell you what they’re charging. If you’re working with a slimy loan broker, they may simply attach their fees onto the cost of your loan, incorporating it into your interest rate, all unbeknownst to you.
In an attempt to avoid any shady dealings, ask for a full breakdown of how much your broker is making off your loan. If your broker isn’t interested in disclosing their fees, it’s possible you need to find someone more forthcoming to work with.
Full Disclosure is Not Required
If you’re working with a loan broker, you’re probably expecting them to fully disclose the range of loan options you qualify for. But again, this is something they are not required to do. And since their full disclosure is not required, it allows room for shady loan brokers to persuade you into accepting a loan with higher fees than necessary.
Some brokers even have deals worked out with particular lenders, where the lender agrees to offer higher loan rates if the broker promises to send more qualified borrowers their way. If this behavior is starting to ring a bell, it’s probably because it’s the same practice that led up to the subprime mortgage crisis. In other words, it’s a way for brokers to make more money, even if it’s not in the best interest of you, the borrower.
Since this is the unfortunate reality of dealing with some loan brokers, make sure you ask your broker to provide you multiple loan options from multiple different lenders. You might also want to ask how their broker fees vary with each option.
How Can You Spot a Suspicious Loan Broker?
Working with a loan broker is supposed to help you, not hurt you, so keep your eyes peeled for these red flags:
They Ask for Money Upfront
Loan brokers work for free upfront and only get paid once your deal has been finalized. If a broker is asking you for a down payment, a credit check fee, a registration fee, or any other form of money upfront, this is not a broker you want to work with.
They Can’t Provide References
References will tell you everything you need to know about a broker. If they can’t provide any references, that will also tell you what you need to know—that you need to find a new broker.
They Lack a Physical Address
If all a broker can provide you with is a P.O. Box, this should be a red flag that you may be dealing with a loan scam, perhaps even outside of the country. Beware.
Know Who You’re Working With
Unfortunately, the bad loan brokers create skepticism amongst small business owners for brokers everywhere. But, keep in mind that just because some of the brokers out there don’t have their client’s best interest in mind, this does not mean that all loan brokers are bad.
The best way to avoid working with someone unethical is to ask a lot of questions, keep an eye out for the red flags we’ve listed above, (as well as these other warning signs). And if you remain diligent and know who it is you’re working with, a loan broker can absolutely be a lot of help, saving you both time and money.
Meredith Wood is the Head of Content and Editor-in-Chief at Fundera, an online marketplace for small business loans. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith manages financing columns on Inc, Entrepreneur, HuffPo and more, and her advice can be seen on Yahoo!, Daily Worth, Fox Business, Amex OPEN, Intuit, the SBA and many more.