Leery of Loans: 5 Sure Signs You’re Swimming With a Shark

Business.com / Funding / Last Modified: February 22, 2017

These loan sharks can be hard to spot, because, unlike the in movies, their appearance is not foreshadowed by daunting theme music.

When traditional debt financing is not an option, alternative lenders are a great source for working capital.

They move faster than banks, require less documentation, and consider more than just an owner's credit score.

Business owners often access this world of lenders through the assistance of an intermediary or broker.

Unfortunately, not all brokers actually have your best interests in mind. These sharks can be hard to spot, because, unlike the in movies, their appearance is not foreshadowed by daunting theme music.

Brokers play a very valuable role in the search for capital. They help match you to the right product, the best terms, and can serve as your advocate during the approval process.

But some brokers can also behave like sharks, opportunistically directing you to products and terms that pay them the highest commissions. That higher commission is added directly into the cost of financing. Most financial services industries are heavily regulated in order to keep the sharks away. The alternative lending space is not one of them.

Related Article: Inside the Mind of the Bank: 4 Factors Affecting a Small Business Loan

There is no reason not to dip your toe in the water when searching for growth capital. There are plenty of ways to spot a shark. Ask your broker these five questions to determine whether or not you are swimming with a shark. Ethical brokers can answer the questions, but the sharks will quickly swim away to find new prey.

1. Does the Broker Charge an Upfront Fee or a "Success Fee”? 

A reputable broker receives compensation from the lender, not the borrower.  Don't take this for granted; ask the question upfront.  If the answer is 'yes', take it as a red flag.  Don't get stuck paying a fee when there are so many free options.

2. How Much Experience Does Your Broker Have in the Alternative Lending Industry?  

There are very few barriers to entry or regulatory requirements for loan brokers. As a result, the industry attracts a wide cast of characters. You don’t want to work with a fly-by-night operator. At the very least, there should be a website with references, testimonials, bios, backgrounds, etc. How long have they been in the business? How many deals have they placed? What's the success rate? These are all legitimate questions to ask. If your broker can't or won't answer to your satisfaction, it's a sign you're about to jump in the water with a shark.

3. Does the Broker Work With Multiple Lenders?

A good broker shouldn't just represent one product or partner. Why engage an intermediary if he/she is only going to introduce you to one partner? Look for brokers with deep industry contacts and a broad set of financial solutions. No two businesses are alike and the best brokers have a variety of options. Ask how many lenders are in their network, what kind of products are available, and what typical terms look like.

Related Article:5 Reliable Tips for Selecting the Right Business Loan

4. How Many Lenders Will Receive Your Application Package? 

A good broker can assess your business and place you with a small number of firms likely to provide competitive terms. However, some brokers will "shotgun" you out to dozens of lenders at a time. This is a sure sign they have no real industry experience and have no vested interest in the success of your business. It is a reckless practice and can have a devastating effect on your credit score. All of those inquiries at once can drop a score 100 points in a week. No more than two to three lenders at a time should be reviewing your business.

5. Is the Broker's Commission Transparent and Reasonable?

Just like a real estate transaction, the broker gets paid at the closing typically a percentage of the amount financed. And, just like in real estate, you should know what that commission is prior to completing the transaction. The broker plays an important, consultative role in the financing process and deserves a commission. Will your broker make their commission transparent? If there's nothing to hide, why wouldn't they?

Just like in any industry, there are always a few bad apples that can spoil the bunch. The Alternative Lending space is no different. You can swim with confidence now that you have the ability to separate the good from the bad. Let the sharks prey on someone else.

Related Article:5 Surprisingly Cheap Forms of Small Business Financing

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