If businesses feel overwhelmed by the task of finding a loan, they can hire a commercial loan broker – also known as a business loan broker or simply a loan broker – to find appropriate debt for them at the best possible rate. Ideally a commercial loan broker has relationships with many different types of debt providers and understands how to match businesses’ needs to the right financing.
The commercial loan broker business is diverse and unregulated. Some specialize in large ($1 million+) complex commercial real estate deals (such as this firm in Boston). Others focus on young or underserved businesses.
Commercial Loan Broker Controversy
This latter segment is controversial. Fintech marketplace Fundera, whose platform competes with commercial loan brokers, has written several articles discussing the problems with “shady” and “predatory” brokers. Another Fintech company Nav also says they should be avoided. The alleged issues include:
- Conflicts of interest – commercial loan brokers have financial incentives to point businesses towards the loans with the highest commissions, which aren’t necessarily the best fit
- Brokers don’t disclose all of the available options to businesses, as a result of the conflict of interest
- Brokers are not clear and honest in presenting the terms of the debt offerings, especially with regards to prepayment fees and refinancing terms
- Brokers hide their own fees for originating the loans from businesses, which can add 10% to 20% on top of already high interest rates
- Brokers sell information on the businesses they are talking with to other lenders
It looks like there are both reputable as well as predatory commercial loan brokers. If you talk to one and you don’t get a clear disclosure of who pays them how much, and you get fast talking and high pressure sales tactics instead of clear disclosure of debt terms, walk away.
See also: The Fintech Ethics Battle