How To Choose A Broker For Your Business
The days when owners or directors of businesses could drop into their local bank branch to discuss obtaining a new loan may be consigned to the history books, but there’s a good replacement option available today that many businesses may not be aware of.
The local bank branch manager’s modern-day equivalent is the business finance broker. Brokers sit between businesses looking for loans and the banks and other lenders. Their help and expertise can make all the difference in finding the best type of loan available and ensuring its terms are competitive.
There’s around a thousand business finance broking firms in the UK. They range from one-person firms to national firms like Anglo Scottish, which has expert brokers located in most regions.
Here’s three steps to working successfully with a finance broker.
1. Tell the business finance broker about your business
To find the right type of finance at the right cost, the broker first needs to understand your business. They will typically want to discuss:
- Background to the business: This will include the legal form (e.g. limited company, unincorporated business or partnership), management team, main business activities, business premises, assets owned such as machinery and equipment, and the existing financial arrangements, including any overdrafts or loans in place. All this information helps the financial broker to match the business to relevant lenders.
- How the business would repay the loan, including whether it could offer a legal charge over assets it owns such as property (meaning that if the business runs out of cash, the lender can still be paid). In general, the stronger the security that can be provided the cheaper the loan, but for asset finance (see below), the equipment being financed is often the only security required.
- Any so-called ‘adverse information’ such as any county court judgements or insolvencies connected to the directors or owners. These factors may affect the availability and cost of finance, although often the broker is still able to help.
2. Review the types of commercial finance available
There’s a wide range of different types of finance available, and experienced commercial finance brokers should be able to help identify the most appropriate one for your businesses’ needs. Options the broker may suggest could include:
- Bank loans: Overdrafts and term loans from high street clearing banks may still be the natural starting point for businesses, particularly from the bank that manages your business current account. The broker will want to check whether you have already considered this in case it is your best option, although the broker won’t usually be able to help with applying for these products.
- Commercial mortgages: There’s a wide range of mortgage lenders, and rates vary depending on the firm’s credit rating, the loan to value ratio and type of property.
- Bridging loans: These short-term loans – typically for three months to a year, secured on property or sometimes plant and machinery – are expensive compared to commercial mortgages, but can still be the best solution in some circumstances.
- Asset finance: Often the cheapest and most suitable way to finance new business equipment and machinery, this is a very active market with up to 100 firms offering a wide range of options. Whatever the name of the product, a key question to consider is whether you wish to own the equipment at the end of the agreement. Rates vary considerably depending on the type of asset, the type of business, and whether you keep the equipment. Using a commercial finance broker that has access to a wide range of finance companies, some of which only work through brokers, can be important to ensure you find a competitive asset finance deal.
- Sale and leaseback: A form of asset finance where a firm sells an asset it owns to a finance company and hires it back. It’s quite a specialised market and terms can vary considerably.
- Contract hire: For firms with company cars, delivery vans or other vehicles, in addition to normal asset finance solutions contract hire – which can provide fully serviced and managed vehicles – is another option to consider.
- Factoring and invoice discounting: These options allow firms to raise money based on their unpaid invoices to customers. The lender will typically pay around two-thirds of the value of the invoices upfront, and then the remaining balance less fees once the customer has paid. The products tend to be more suitable for larger firms and there are many factors to consider, so expert advice from an experienced commercial lending broker is important.
- Peer-to-Peer loans: A growing sector of the commercial finance market, the peer-to-peer market matches businesses looking for funding with investors, bypassing the banks. The rates vary considerably, but for some businesses this ‘alternative’ finance can be ideal.
Not all business finance brokers are equipped to deal with the full range of types of finance, for example many specialise in asset finance and only a minority can offer peer-to-peer loans. That’s fine if it’s clear what type of finance is needed, and the broker is a specialist in that product, but otherwise consider approaching a firm that can advise on the full range of business funding options from a wide selection of lenders.
3. Check you’re happy with the quotation provided by your financial broker
If you’re working with a business finance broker, the quotation they obtain for you shouldn’t come as a surprise, but here are the key factors the broker will want to confirm you are happy with:
- The overall cost including any extra charges, in addition to the regular monthly or quarterly payments. These charges might be described by commercial lenders as set-up, administration, documentation, or annual fees. For asset finance, the broker will want to confirm you are happy with what happens at the end of the contract, i.e. whether there’s an option to purchase the equipment.
- Terms of the agreement, which for asset finance might include conditions regarding the return of hired equipment, or ‘balloon’ payments (a higher lump-sum payment at the end of the agreement).
- Security requirements, such as a charge over business or the owners’ or directors’ personal property.
Overall, a key point to review at this stage is whether the terms the business lending broker has been able to find are attractive enough to allow you to go ahead with the investment without a significant risk of not being able to make the repayments.
How to find a good broker for your business
Finally, we’d like to offer our advice on where to find your business finance broker. Each broker is different. These are some of the factors that could help your choice, along with questions to ask your broker before you work together.
- Sector: Does the broker have experience working with your sector and/or type of equipment?
- Lenders: How many banks or other finance companies does the broker work with, and do they cover all types of finance you might be interested in?
- References: Has the broker worked with similar businesses and can they provide a reference?
- Charges: Does the broker charge any fees in addition to earning a commission or margin?
- Location: Is it important to you to be dealing with a broker based locally?
- Rate: What approximate rate of interest does the broker expect to achieve for you?
As one of the largest independent brokers, Anglo Scottish has experience working with all sectors, all the types of finance that we have described above, and a wide range of lenders for each type of finance. This allows us to search the market place for the most suitable funding solution at the cheapest rate available. We charge no fees for our services, as we will earn a commission should you decide to take out a finance agreement.
We have representatives across the UK, contact us to discuss your requirements and we’ll put you in touch with one of our specialist advisors.