Business Loan Middlemen… Pros & Cons
By Eugene E. Valdez AKA The Loan Doctor
The commercial loan business is a billion dollar industry and as more and more individuals pursue entrepreneurship either by choice or necessity, ( can’t find a job) the demand for business funding will continue to rise unabated. Witness the proliferation of on-line lenders in recent years. This has occurred because traditional lenders like banks can’t keep up with the demand and their “credit approval box” is narrowing.
Many business owners seeking expansion capital recognize that they are not professional “loan hunters” and as such sometimes resort to “middlemen” to help them find the best loan deals out there. These “middlemen” go by various names such as loan agents, loan advisors, or loan brokers. There are many honest and qualified loan brokers out there but there are just as many that are not. As a business owner you need to be careful when hiring a loan broker.
Frequently, my prospects ask me if I am a loan broker. My response is that I am not and I indicate that I am a consultant and I back up that claim with a scope of loan services that brokers do not provide.
The purpose of this article is to outline the differences between a loan broker and a loan consultant and then you as a business owner can decide which one is best for you.
First a few definitions: (per dictionary.com)
- Loan Broker: An agent who sells, (think loans) for a principle, (think lender) on a commission basis.
- Loan Consultant: A person who gives expert advice and provides professional services for clients.
Who pays the loan funding fees?
75 % to 100% of loan brokers that successfully find a loan for a client are paid by the lender that made the loan. In my consulting business I always get paid by my clients never by the lender.
In my opinion recommending that a business client accept a loan from a lender that is paying me a commission is a conflict of interest, that’s why I never get paid by lenders.
Let me elaborate more on this issue. How do you as a business owner know that if I were a broker and I helped you find a loan, that it was the very best loan you could qualify for? What if there was a better lender/loan out there for you (let’s define “better loan” in terms of interest rate, fees, collateral, personal guaranty, etc.) but I never brought that “lender to the table” because that lender does not pay broker commissions?
Big, fat commissions paid by lenders cloud broker’s judgement and influence their behavior in their dealings with business loan clients. It’s just human nature. Is this not one of the biggest complaints of Wall Street stock brokers? i.e. they put their compensation interests ahead of their investors interest?
Most loan brokers are transaction oriented, as a consultant I am lender/client relationship oriented. Most loan brokers do not advise you on how your loan should be structured or help you negotiate your loan terms and conditions, as I do. It would be awkward for brokers to negotiate loan terms with the very lenders that are paying their commission. The attractiveness of any loan is all about the terms and conditions. All of which are negotiable if you know how to do it.
In summary, if you feel you need to resort “to a money finder” my opinion is that you seek out a professional who has the credentials to help you identify what size, and kind of loan you need and who has the expertise to help you negotiate the loan terms and conditions.
Brokers have a strong business value proposition in that if you hire them you will not incur any fees either upfront or at loan closing as they are being paid by the lender. Saving money is certainly very appealing to any business owner but you should consider all the issues I outlined in this short article before you make your final decision as to what kind of professional you should hire. Maybe you will still decide to hire a loan broker but if you do, hire a good one, get references and conduct your due diligence and learn how to negotiate.
Eugene Valdez is a 40-year veteran of business/financial management and owner of The Loan Doctor, a full service business loan consulting firm based in Upland. He can be reached at firstname.lastname@example.org.