Applying for a business loan can be an intimidating process with immense amounts of paperwork and background checks to go through. At first glance, a business loan broker, someone who knows the ins and outs of the trade, seems like a logical idea.
The question is, how does a business loan broker work? You might even be wondering, ‘can I trust a business loan broker?’ or ‘should I rather just apply directly?’ This article will discuss exactly what a business finance broker is and highlight some of the conflicts of interest that can occur when using one.
What is a Business Loan Broker?
A business loan broker is a guide that will help you navigate the tricky aspects of business loans. These brokers make their living by helping business owners get approved for capital that they need through various types of loans. A broker will usually receive a commission, generally a percentage of the total loan amount.
The implied benefit of using a broker is that you don’t actually pay them directly. They work off of commission which is paid by the company that provides you with the financing. This does however add some doubt or apprehension to decisions since it is hard to know if they are offering a product that is best for you or for their pockets.
The most important benefit of using a business mortgage broker is that you are accessing their knowledge about the different financing options available. Generally, these individuals also have relationships with different financing or lending partners. These can range from traditional to non-traditional banks, making it a reliable way to find the right financing for your business.
Does a Business Mortgage Broker Have Any Conflict of Interests?
When a broker’s income is determined by the amount that you are financing, this is a perfectly valid question to consider. It is a clear indication that their personal life will be impacted by their professional responsibilities. There are a few scenarios that could potentially play out that would classify as a clear-cut conflict of interest.
The Current Business Loan Broker System Favors the Lender
The structure of the current system means that the broker and lender’s interests are identical. They are both attempting to get the largest amount possible for a loan for maximum returns. This is a disadvantage to the client if the broker is persuading them to apply for a loan that is larger than the amount that they need.
The broker can also attempt to persuade the customer into a position to pay the loan off over a longer term and earn the lender more money as well.
Brokers Could Favor Particular Lenders
Everyone has favorites and brokers are no different when it comes to preferring certain lenders over others. In situations like these, the broker is offered a financial incentive of sorts, like a higher commission percentage to choose that lender over others.
This particular lender might not be best for the client, rather they are best for the business loan broker. Therefore, a conflict of interest occurs. The broker would not be able to provide an unbiased suggestion as there is a financial incentive for them to offer a specific lender.
The Business Loan Broker is Also a Lender
There is a clear conflict of interest when the business finance broker’s company is also acting as a lender. This information would not be known to you unless it is disclosed. If it’s not disclosed, the broker suggesting their company as the perfect lender option is a clear case of bias. Both the broker and the company would be benefiting financially, twice.
An example of this would be going to a bank and asking for a loan from the in-branch business finance broker. Although they are a broker, they are employed by the bank and so will push their bank’s offers. This is to be expected though. If you go into a bank, don’t walk in expecting a true third-party unbiased view from a broker in a bank.
Situations like this can also be experienced when the firm you approach is constructed within an integrated business model and offers both open-market broking options and insurance agent options. This kind of business model has a built-in conflict of interest to where the broker will be acting in a dual capacity.
The Broker Handles a Claim on Your Behalf
If you do need to make adjustments to your loan due to unforeseen circumstances, the broker is the middleman conducting the claim. If the broker has been given authority by the lender to handle the claim, the broker is aware of the private discussions you have had with him.
This causes a conflict of interest to where the broker is fully aware of your financial capacity for repayments and is also in a position to negotiate on behalf of the lender. This could lead to a higher repayment than the company would have offered themselves, as the broker knows you are able to pay a slightly higher monthly amount.
Should You Use a Business Finance Broker or Apply Direct?
Although they do have inherent conflicts of interest, you are using a business mortgage broker on the basis of finding the best offer. Applying directly will remove all potential conflicts of interest, however, you are left having to fill out each application to ensure that you meet the specific criteria set out by each lender.
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