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You might have heard of a business loan consultant before, commonly known as a SME loan broker as well. Is it worthwhile for SMEs to engage a broker to secure a business loan in Singapore?
Applying for a SME loan could turn out to be an extremely tedious process. In fact, for many small business owners, it’s painstakingly hard to take the first step due to the sheer number of requirements banks might ask for.
You might be a business owner who’s looking for a business loan for financing an expansion, working capital requirement, or equipment upgrade. However, you aren’t sure if you can pursue this seemingly tiresome task on your own.
Gathering data and documents alone is a time-consuming task especially if you haven’t organized or updated your files regularly. Preparing a good business plan, including realistic projections, eats up your valuable time.
And because you’re busy managing your business, you simply can’t drop everything and immerse yourself in the loan application process.
You might not be sure also out of the many banks and financial institutions which has the lowest rates and best deal.
Role of SME loan broker
Fortunately, there are business loan consultants who take on the role of an intermediary, a “go-between” linking you to suitable prospective financiers.
His/her key role is to ensure that the loan application process, from satisfying a creditor’s requirements down to the actual SME loan disbursement, runs smoothly.
Value add of business loan consultants
But do you really need a loan broker if you can do all the paperwork (and legwork) without spending a single dollar on broker’s commission?
It all depends on your priorities really.
Some business owners would rather brave the loan application process while others choose to outsource the task to a broker to save time and effort.
In the latter case, the benefits of using a broker should far outweigh the advantages of going through the process without the aid of a “go-between”.
So, what are the benefits of getting a broker? What’s in it for you aside from saving valuable time? Here are some considerations for hiring a loan broker.
Contacts and network
Professional brokers, especially those who’ve been in the business for years, have built relationships with a multitude of financiers and bankers.
They’ve known and worked with so many banks and financial institutions in the past and this gives them (and you) the advantage of knowing which ones could offer the best deals. A loan broker knows where to search a financier who is a good match for your funding needs. He’ll find the missing piece of the puzzle.
You’re paying for the extensive contacts of a business financing specialist whom have filtered through numerous bankers and have direct ready access to bankers whom are responsive and dependable. Your applications will land up in the right department and personnel, without all the "ding-dong" to-and-fro if you were to call in the bank's hotline.
A broker is also aware of new loan products and promotions. He would know every useful and latest information about lenders and loan programs because of his range of contacts and network. In other words, he is in the loop.
Speed and efficiency
If you urgently require funds fast due to specific time sensitive reasons, such as fulfilling certain contractual obligations (i.e. to meet delivery of goods fulfillment deadline) or to seize an opportunity (i.e. certain inventory/assets are selling for cheap), a broker might be able to help you get the financing deal done faster.
Reason why so is not due to some “magic” but boils down largely to the broker’s familiarity with documentations required & which banks processing time at that point of time could turnaround the application in the shortest time.
Expertise and experience
A seasoned broker will have both mastery of and experience in the lending process as well as credit documentations.
He’s aware of the banking market, including indicative rates and knows spot on if a loan is over or reasonably priced. He has knowledge of the common types of collateral offered as security for loans. You can also count on him to provide solid advisory on more complicated facilities such as trade financing and invoice financing.
He’s also aware of basic laws and regulations governing lenders and borrowers. Since he has reviewed most types of loan contracts, you can rely on him to discuss with you terms and conditions that aren’t clear to you. He can walk you through each loan provision and highlight on any business loan fees to look out for.
Alternative strategy and practical advice
Getting a loan through a broker doesn’t guarantee that you’ll obtain a loan the first time you approach a bunch of creditors. In the event of banks’ rejection, your broker can still work it out for you as he knows of other financing options. You may not qualify for a traditional bank loan, but you may get the green light for a merchant’s cash advance or a revolving credit line.
A good loan broker has a ready plan “B” and a string of other alternatives such as startup business loan prepared for you just in case. He can also advise you what are the possible reasons your application is rejected and how you can improve on your credit standing in future.
Favorable loan terms
A loan broker knows that presenting your loan proposal to a handful instead of a single financier is a strategic way of getting the best of the best loan terms offered in the market.
By approaching multiple banks and financial institutions concurrently, your broker can compare which ones offer the best rates and terms while saving you time and resources. Brokers familiar with the various government financing schemes such as the Enterprise Financing Scheme and the Temporary Bridging Loan Programme can also help you source out cost efficient funding options.
A broker can help you “collect and select” the optimum loan deal for you. Obtaining a term loan at favorably low and fixed rate, for instance, presents long term benefits as you’ll be paying lower interest until the end of the loan term.
Handling the small details
A broker will go down to the fine details and assess how you would fare in the eyes of a potential lender. He’ll be able to point out red flags that could lower your chances of getting approved.
Different banks have different credit criteria that most SME owners are not aware of. For example, do you know that your business industry nature might affect your chances of approval as bank A might be receptive of certain industries while bank B might shun the same industry?
Assisting you with the nitty gritty of loan assessment frees you from the grind yourself and even improve your chances of securing a business loan.
Red flags look out for in a loan broker
It’s not enough that you know the advantages of using a broker. It’s also critical to decipher which ones have your interest in mind even though they do have an established working relationship with banks and lenders.
While there are credible, professional loan brokers out there, there are also brokers who bring a bad name to the industry. Here’s a quick list of “red flags” to watch out for.
No contact information or proper business premise
A loan broker who doesn’t have a working contact number and an office or postal address identified with his brokerage business makes one question the legality of his business or even its existence.
Your objective is to ensure that he isn’t operating as a fly-by-night loan broker. Such brokers usually are one-man setups working from home.
You can ask a broker how much commission he’ll be realizing when he brokers for you. You also have the right to ask about his network of lenders and important details such as the full cost of the loan he is arranging for you.
If he can’t give you clear answers or appears lacking in transparency on this info, it’s better to be more skeptical about his competency.
Operating history, references and testimonials
Check the broker's company operating history via ACRA Bizfile. If the company is very newly setup with just less than 2 years operating history, they might not have a competent track record. Also check if they are able to provide references or testimonials from previous clients to prove their past successful track records for satisfied clients.
Beware of a broker who guarantees to get you a loan without checking on your financials and credit history. Don’t get blinded by these guarantees. Promising the moon and the stars despite glaring issues that could stall your loan application (i.e., poor credit standing, unstable cash flow or lack of acceptable collateral, little or no track record) raises doubts about his credibility.
You should not engage a broker whom talks big and are able to “guarantee” loan approval.
The truth is, no matter how competent a broker, no one can guarantee assured loan approval as the final decision lies with the bank’s credit approver.
No third party such as a broker can guarantee approval. A responsible and experienced broker should be able to advise you chances of an approval after his preliminary assessment of your financials. But definitely impossible to "guarantee" an approval.
The tell-tale signs of a fly-by-night or inexperienced broker is someone whom talks up his banking contacts or credit savviness and assures 100% guarantee of loan approval. These brokers usually do so to seal the deal quick.
Fraud and scams
As this is an unregulated industry, the barrier to entry is extremely low and there will definitely be black sheep that taints the industry. There have been reported cases of brokers who committed fraud, commonly by forging documentations and scamming banks and financial institutions with fraudulent applications.
Do not proceed with the engagement if you smell anything amiss with the loan broker you're considering.
Consider engaging loan consultants who have been featured in independent media mentions (not press releases) as these are signs of credibility and industry though leadership.
Cost of engaging a loan broker
Most SME loan consultants are remunerated on a performance and success basis. Fees are only applicable if the broker successfully procures loan approvals for client.
Fees are usually quoted based on a percentage of approved loan amounts. Typically, it’s within the range of 3% to 6%. Some brokers also quote just a simple flat fee instead of a percentage.
The fees quoted are based upon certain variables such as the targeted loan size, complexity of the case and the financial position of the applicant company.
In general, fees should be at the lower range when you’re targeting and can qualify for a higher loan quantum (usually $300K and above).
Also, if your company or yourself have multiple credit issues such as previous adverse credit records, lack of financial documentations, reported losses in financials, weak cash flow position etc it might not be reasonable to negotiate for lower broker fees.
The reason is because the broker must put in additional man-hours and effort to address and mitigate these issues to potential lenders in order to secure an approval.
It is common industry practice for brokers to commence work upon a signed engagement form with the client without collecting any deposit or fees.
In such performance based remuneration structure, the interest of the borrower and broker are aligned as the broker must put in the work upfront to source and negotiate for the best financing deal to get paid.
It is also a fairer and more equitable arrangement for you as there is no upfront costs involved and you should only pay for performance.
However, some brokers might request for an non-refundable upfront processing fee, with a lower percentage on the eventual success fee. This is however not a common industry arrangement.
When should I engage a broker?
In summary, consider engaging a loan broker if:
- This is the first time you’re applying for a business loan
- You do not have the time or resource to compare all SME loan rates across multiple banks
- You need funding urgently to meet certain commitments or seize a business opportunity
- Your credit profile might not be in the best of shape
- You’ve been rejected by a bank before for your business loan application
- You don’t have latest updated documents such as financial projections, business plans
If you fulfill most of the above scenarios, a broker might be able to add value to your financing application process.
There are still benefits to get a non-obligatory opinion of a experienced business loan consultant on your company’s financing eligibility before deciding whether to engage a SME loan broker.