Gone are the days when business finance was exclusively delivered through a bank manager at the heart of the local community in the form of a traditional bank loan. Now, commercial lending is increasingly dominated by alternative lenders who are bridging the gap left by the big banks and their reluctance to lend to SMEs during the 2008 recession. From revenue finance to invoice discounting, commercial mortgages to merchant cash advances, the options are now endless.
This means greater access to finance for, but it also means it can be hard to know where to start, regardless of whether you’re a first-time business owner or a serial entrepreneur. This guide covers the advantages and disadvantages of directly approaching a lender versus appointing a commercial broker to handle it for you, and will hopefully leave you knowing whether you’re better off going it alone or appointing some help.
What is a commercial finance broker?
A commercial broker, also known as a business finance broker, acts as the ‘middle man’ between you and the business lender, aiming to get you the best funding solution, in return for a fee.
There are quite literally hundreds of commercial finance brokers across the UK, ranging from one-man-bands and franchises with appointed representatives to national workforces. And they’re all working hard to keep up-to-date with the rapidly emerging alternative finance options available to SMEs, so you don’t have to.
The pros and cons of using a commercial finance broker
Business finance brokers are a mixed bunch, and often lack the regulatory protections that we’re used to in personal financial matters. So, what can you expect them to bring to the table and what should you look out for?
Only pay on completion
Working on a ‘pay on success’ basis is great for SMEs, as it reduces the risk of appointing a broker to do the hard work. Thankfully, credible brokers will only charge you a fee once you accept a loan offer that they’ve found for you. The fee (or commission) will either be paid directly to them, or it will be added or deducted from your loan. Make sure you have the fee conversation early on and get it set out in writing before engaging them.
If they want an upfront fee, it’s worth carrying out some online checks to see if they have any credible reviews, as this is a sign that they’re not confident in their ability to find you finance, or they’re inexperienced and may cost you more than they’re worth.
A broker should save you time — and money
If you find a good broker, they should be able to save you time and money. Many brokers will say that they cover the ‘Whole of Market’ which means that they offer access to all the business finance products on the market. This should mean that, after reviewing your business, they’ll be efficient in approaching the lenders with the best finance products for your needs and get you the cheapest deal - so even with their fee, you’re saving money.
If you’re unsure whether you’re in good hands or not, test them, ask them how many lenders they work with and what types of finance solutions they cover. They’ll soon come unstuck if they don’t know the market.
Apply once — let your broker handle the paperwork
Applying directly to lenders is can be time-consuming and monotonous, especially if you’re not sure what finance is right for you. And that’s after you’ve spent a few hours researching and deciding which lenders to approach. When you appoint a decent broker, you’ll provide them with all the information in one go and they will handle the individual applications and lender requests, so you can get on with running your business and await the results.
Questions to ask before appointing a broker
A good broker is invaluable to any business, but as the alternative lending market expands, so has the number of commercial brokers offering help to small businesses. To ensure you pick a good apple, here are some questions you should ask yourself before appointing a broker.
1. Do they have real case studies?
It’s all too easy to set up a website claiming you’re a commercial finance broker and unfortunately this sector attracts many fly-by-night operations, with fake websites often using stock imagery and fake testimonials to look legitimate.
Therefore, if a broker has reviews or testimonials on an independent customer review site, or they have named customer case studies on their website that you could easily pick up the phone to then it’s a sign they’re legitimate and trustworthy.
2. Are they regulated by the Financial Conduct Authority (FCA)?
The business finance market is largely unregulated, and although many unregulated business finance brokers will provide a great service it is likely to be a safer bet to work with a commercial broker who is regulated.
3. Are they restricted to one finance product or tied too closely to a lender?
The emergence of alternative finance has led to new products hitting the market and the traditional fixed term loan is now just one of the many ways you can finance your business. From financing your invoices to borrowing based on your card payments, there are literally hundreds of options. So, if your broker claims to specialise in one product or represent just one lender then it’s probably worth looking elsewhere.
4. Are they part of the NACFB?
It’s by no means a deal-breaker if your potential broker isn’t a member of the National Association of Commercial Finance Brokers (NACFB), however it is a good indication that you’ll receive a good service, as NACFB members adhere to an industry-recognised Code of Practice.
The pros and cons of going directly to a lender
A business lender is a financial institution that makes loans directly to your business.
Scouting the market and applying directly means you’ll save on broker fees, which means it can work out to be the cheapest option - but only if you know how to pick the right product or lender. So what are the advantages of applying directly to a lender?
Save on fees
Like Fleximize, most lenders won’t charge you an arrangement fee if you go to them directly. This is because the arrangement fee you would normally see deducted or added to your loan would pay the broker and therefore when you apply directly via the lenders’ website, they will not owe anything to a broker.
Getting to know the lender can pay off
If there are any hiccups in underwriting, or any complexities with the business, it’s likely the underwriting team will need someone to provide them with some clarity. And let’s face it, who’s better at explaining your business than you? By cutting out the middle man, it’s likely the lender will get more comfortable with your funding request, which could result in better terms and even better rates. Creating a rapport with the lender is also likely to work in your favour if you ever need more finance for growth.
Get the money you need faster
Although brokers work quickly, they’re likely to obtain quotes and offers from several lenders, which can result in it taking longer to obtain the finance than if you applied directly to a lender. By going directly to the lender, you can tell them your specific requirements from the off, iron out any questions around your application and find out about any benefits the lender provides that your broker may not explain. By handling your application, you’re likely to receive faster decisions and potentially more favourable terms.
There is, however, one disadvantage of applying directly to a lender.
You’ll need to do the legwork
These days, most online business lenders have simple application forms with clear instructions on what documentation is required. However, if you’re not successful with one lender it may lead to having to fill in multiple application forms and sending different documents, depending on lender requirements. And this is on top of the time you’ve already invested researching and deciding which lender to approach. Essentially, unless you know exactly which lender you want to work with, and you’re approved immediately, you may need to invest a substantial amount of time.
Think the direct lender route is right for you?
At Fleximize, we understand the challenges faced by growing businesses trying to raise finance and if you apply with us directly you’ll be charged no upfront fees. Our business loans come packed with flexible features and are the perfect solution for small businesses that need to keep close control of their cash flow. Here’s a summary of what we offer:
- Business loans of £5,000 – £500,000
- Unsecured and secured borrowing options
- Flexible repayment terms of 3 – 48 months
- Speedy application with minimal paperwork
- Approval and deposit in as little as 24 hours
- No hidden fees or early-repayment penalties
- Interest charged on a reducing balance, not the total loan amount
- Repayment holidays and top-ups available with all loans
- Exclusive discounts on industry-leading business services
Applying with Fleximize is simple
If your business has been trading for a minimum of six months we’d love to hear from you. To start your application with Fleximize, simply click the button below and complete our short application form. If you pass our initial checks, a member of the team will be in touch to guide you through the final stages. Alternatively, feel free to check out our FAQS page or give us a call on 020 7100 0110. We’d be delighted to answer any questions you have about our funding.