Eight questions when seeking capital: Question 1 and 2

Corporate Question

By: The Business Backer

Question 1: What Type of Lender Are You?

Like many businesses in this world, there are lenders who work hard to deliver good solutions for their clients’ best interests, but there are others who don’t.

Let’s first define these groups:

BROKERS
A broker is a third party sales office whose primary job is to bring together lenders and borrowers. Brokers find business owners in need of funding, collect their information, and shop the deal to multiple funders. Seems like a good idea in theory; the business owner saves time by hiring someone else to do their research and comes out with the best deal in the market. The problem is finding a trustworthy broker who will do just that. While there are reputable brokers out there who put the business owner’s interest first, some will push deals that are much larger than the business owner originally wanted or can afford, simply to collect a larger commission. Others will conveniently leave out that they are, in fact, brokers and not direct lenders. Added commissions charged to the business owner can be as much as 20% and these are often hidden in blended invoices.

 

DIRECT FUNDING COMPANIES
Direct funding companies remove the middleman and work with the business owners directly for their funding needs. Direct funding companies typically offer a specific financing product built for businesses within their ideal credit box. Credit models, approved industries, deal amounts, terms and fees vary from funder to funder, which can make the search for the right product very time consuming. Compared to the lengthy paperwork and approval process required by traditional lenders, direct funders can typically provide approvals and funding within a matter of days with little to no paperwork.

NEW – FINANCING FACILITATOR
Facilitators are direct funding companies with the capabilities to not only provide direct funding themselves, but can also facilitate funding from partner funding companies, credit unions, banks and SBA lenders. Unlike brokers, facilitators not only have a network of partners representing the full spectrum of lending options available for their small business customers, but they also are a direct lender themselves. Facilitators evaluate the credit profile and borrowing circumstances of the small business to determine the best options. For instance, a small business may be “bankable,” just not with the bank where they currently hold their business deposits. There could be banks in other areas of the country that will welcome these small businesses, even if their current bank does not. By managing these partner relationships and staying up-to-date on new options and policy changes, facilitators can offer a variety of options so you can make an educated decision on your financing.

 

Whether you choose to work with a broker, direct funder or financing facilitator, understanding who you are working with and what to expect are the first steps to finding the right financing option. Understanding your lender’s process and asking these questions before any agreement is sent can save a lot of time, headaches, and money.


Question 2: What Fees Are Involved?

Hidden fees are commonplace in the consumer world, tacked on to a wide variety of purchases including airline tickets, cell phone plans, and medical treatments. Another frequent example is cable and internet service; we’ve all heard something about the Comcast debacle. It’s no surprise these fees are also common in the unregulated small business lending space. The truth is that some fees are necessary, such as those that intend to cover risk or services needed to process the loan. Other fees are completely frivolous and do not supplement anything except the broker’s or lender’s pockets.

How Bad Is It?

With new lenders and brokers opening their doors every day and more capital available in the market for small businesses than ever before, the fight for the lowest rate is a cut-throat battle. The desperation to gain market share while continuing to make a profit has led some lenders and brokers to add unnecessary “fees,” which allows them to post a lower rate than the competition to earn business despite charging more. Fees may be disclosed and defined or they could be included within a blended, lump sum cost in the agreement, which is extremely confusing for you.

 

Here is an example of a competitor agreement and our breakdown of the real cost:

 Fee Structure Example

How Is It Legal?

Brokers and lenders often blend fees and have no cap on the amount of extra fees they can add to the final cost. At The Business Backer, we have even received competitor funding agreements with fees that are entirely fabricated with no tie back to actual services. Without knowing what to look for or what to ask, you could be paying thousands of dollars in unnecessary fees. For information on the self-regulation movement in the small business lending industry, check out Jim Salters’, CEO of The Business Backer, recent guest blog post for LendIt.

WHAT ARE THESE FEES?
Fees can have many different names and definitions depending on the broker or lender. Here are the common ones we see:

Origination Fees – Charged for processing a new loan.

 

Platform Fees – Some lenders claim this fee is for “monitoring credit and cash flow of the business.” Most definitions of this fee are vague and (purposefully) unclear.

 

Loan Guaranty Fees – Charged to protect the broker or lender from default. As of October 2013, the SBA does not require these fees for their loans under $150,000.

 

Loan Servicing/Packaging Fees – Covers administration costs to service the loan from disbursement to pay off.

 

ACH/Wire Transfer Fees – Charged to send the capital directly to the client’s bank account.

Broker Fees – Commission fees provided to the loan broker. While fees can be as low as 1%, we’ve seen fees as high as 20% of the total loan amount. These fees are often embedded into the payment multiplier section of the contract and difficult to see.

 

Closing Costs – Could include a variety of different fees to service the loan and can vary based on the lender. Typically 1 – 2% of the total loan.

 

WHAT CAN YOU DO?

Remember that the lowest rate may not be what it seems. Doing the math in order to understand the total cost of the loan with these additional fees allows for a better apples-to-apples comparison when deciding on a funding partner.

 

Don’t be afraid to ask questions. If you are unsure about a fee, you should always ask. Good lenders and brokers provide complete transparency about their offers and are more than happy to answer any questions.

Get another opinion before making a decision. Whether it comes from friends, family, or a trusted advisor like your CPA or attorney, getting feedback from an outside source can help you see your offers from a different perspective and identify questions you may have missed.

 

Purdue University, 610 Purdue Mall, West Lafayette, IN 47907; 765-494-4600

© 2016 Purdue University | An equal access/equal opportunity university | Copyright Complaints | Maintained by Office of Supplier Diversity

Trouble with this page? Disability-related accessibility issue? Please contact aocom@purdue.edu.