How to Start a Loan Broker Business
Whether you’re tired of working at a dead-end job, your company is facing lay-offs, or you just want to be your own boss, the opportunity to become a loan broker might be a perfect fit.
This article gives you an in-depth look at how to become a loan broker, how to start a loan broker business, and how to be a loan broker that is recognized and trusted in the industry.
What Is a Commercial Loan Broker?
Whether they are looking to expand their operations or smooth over cash flow hiccups, at some time or another almost every business needs to borrow money. As a commercial loan broker, you help to arrange the loans and financing for these companies. As explained in Fundera’s article on commercial loan brokers, the broker locates lenders who will approve these businesses for their needed capital injection. For this service, the broker will typically receive compensation in the form of a small percentage of the amount financed.
What Are the Benefits of Becoming a Loan Broker?
Compared to many other professions, becoming a loan broker offers significant earnings potential and respect. Successful brokers earn over six figures a year, while being their own boss and having the ability to create a balanced professional and personal life.
Best of all, to become a loan broker doesn’t require an overwhelming startup investment. You don’t need a degree in finance or 20+ years of industry experience to start. All you need to take advantage of the loan broker business opportunity is passion for what you do, a strong work ethic, the right training, connections to lenders, and a strong mentoring network.
Licensing Requirements to Start a Loan Broker Business
It’s critical to think through the requirements you need to run your loan broker business. Although most states don’t require a broker to be licensed to start a loan broker business, there are some that do. The best way to determine whether or not you need a license in your state is to investigate and do your research.
Each state has a licensing board that can provide this information. You can also check with member organizations in the banking industry or with your local branch of the Small Business Administration. Currently most states do not require commercial loan brokers to be licensed. However, about 20 states do require some form of license. This may apply to only real estate loans, only non-real estate loans or may be required for both. If you are required to be licensed then you will need to meet the specific licensing requirements that are necessary and can include certification and testing.
It’s very important to check thoroughly about license requirements rather than to assume your state does not require one. There may be financial or even criminal penalties involved if you operate your loan broker business without a license where one is required.
Commercial Loan Broker Training
An essential first step in starting your loan broker business is to get the proper training. The knowledge and skills you learn during this time will be the foundation for the way you conduct your business and how it operates. You want to be sure that you do your research when selecting a commercial loan broker training program. The time and money you spend on your training will either be the best or worst investment you can make for your future professional career so be sure you do your research when selecting the best loan broker program.
You can learn more about the Institute’s commercial loan broker training options by visiting our commercial loan broker training page.
Setting Up Your Brokerage
Setting up your company and how it will run and operate is an important part of starting your loan broker business. We will examine the various steps involved one by one, from creating your legal entity, to getting you tax ID, to financial accounts, and more.
Registering Your Commercial Loan Brokerage as an LLC
A limited liability company (LLC) is a type of legal structure that provides the limited liability features of a corporation and the tax and operational flexibility of a partnership. The “owners’ of an LLC are referred to as “members”. Depending on the state, the members can consist of one individual, two or more individuals, corporations, or other LLCs.
LLCs are not taxed as separate business entities. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns.
How to Form an LLC for Legal Protection
While each state has slightly different variations of requirements for forming an LLC, they all adhere to these same general principles:
- Choose a business name: There are 3 rules your LLC name needs to follow:
a. It must be different from any existing LLCs registered in your state.
b. It must indicate it’s an LLC with its name (such as “LLC” or Limited Company).
c. It must not include words restricted by your state (such as “bank” and “insurance”).
Your business name is automatically registered with your state when you register your LLC, so you do not have to go through a separate process.
2. File the Articles of Organization: The articles of organization is a simple document that legitimizes your LLC and includes information like your business name, address, and the names of its members. For most states, you file with the Secretary of State. However, other states may require that you file with different agencies of your state, such as State Corporation Commission, Department of Commerce and Consumer Affairs, Department of Consumer and Regulatory Affairs, or the Division of Corporations & Commercial Code.
3. Create an Operating Agreement: Most states do not require operating agreements. However, an operating agreement is highly recommended for multi-member LLCs because it structures your LLC’s finances and organization, and provides rules and regulations for smooth operation. The operating agreement usually includes percentage of interests, allocation of profits and losses, member’s rights and responsibilities and other provisions.
4. Obtain Licenses and Permits: Once your business is registered, you may need to obtain business licenses and permits. Regulations vary by industry, state and locality. Refer to the Business License and Permit guide to find a listing of federal, state and local permits, licenses and registrations you’ll need to run your business.
5. Announce Your Business: Some states, including Arizona and New York, require the extra step of publishing a statement in your local newspaper about your LLC formation. Check with your state’s business filing office for requirements in your area.
Forming an LLC for your loan broker business that complies with your individual state’s requirements can be confusing. Thoroughly doing your research and visiting sites like NOLO’s 50 State Guide to Forming an LLC can be useful.
How to Become A Loan Broker with the IRS (EIN or TIN)
To start a loan broker business on the right foot with the Internal Revenue Service, you will want to register for an Employer Identification Number (EIN). Your EIN is also known as the Federal Employer Identification Number (FEIN) or the Federal Tax Identification Number, is a unique nine-digit number assigned by the IRS to business entities operating in the United States for the purposes of identification. When the number is used for identification rather than employment tax reporting, it is usually referred to as a Taxpayer Identification Number (TIN), and when used for the purposes of reporting employment taxes, it is usually referred to as an EIN.
Most brokerages can register for their EIN online. To learn more about EINs, the application process, and registration process visit the Internal Revenue Service’s website.
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Be a Loan Broker Whose Name Is Protected
U.S. trademark protection is granted to the first entity (LLC) to use a particular and unique “mark” or name in the city, town, or state where it operates, regardless of whether the mark is registered. But if your chosen mark is already registered by another company, even if you used it first, your registration will be rejected and you’ll probably need a lawyer to help you proceed.
The best way to avoid this headache is to make sure before completing the online registration form that you check the Trademark Electronic Search System (“TESS”) database to make sure another company hasn’t already registered an identical or similar trademark for their commercial loan broker business.
Online trademark registration costs between $275 and $325 and requires information such as the kind of services your mark will be used for, the date of the mark’s first use, and whether there’s a design element to the mark you’re looking to trademark.
Once you’ve sent in your application, you should receive a response within six months of filing, according to the U.S. Patent and Trademark Office. There are some circumstances where registering through an intellectual-property attorney, or at least seeking legal advice beforehand, makes sense. If your mark is similar to another registered mark, or similar enough to confuse people, there’s a decent chance your registration will be disputed.
If this happens, and you don’t want to change the mark of your brokerage, a trademark lawyer may be able to help you find a way to get you some protection.
Opening a Business Bank Account for Your Loan Brokerage
Opening a business bank account is a critical task for any new business owner. Even if you are the only person working and managing your brokerage, having a business account is the best way for you to keep track of your finances. Having a separate account for your broker business and personal finances helps make day-to-day transactions easy to follow and document, which is critical for satisfying the IRS.
Business banking is different from consumer banking so the bank where you have your personal checking account may not necessarily be the right one for your business. When deciding where to open your business account, consider the different financial institutions in your area. Talk with each of them to find out their specialty and see if it is a good fit for you and your business. Some banks are small business specialists, whereas others may focus on property or equipment loans. It’s a good idea to see if they have knowledge of programs that can make your business better. However, be aware that some bankers will encourage you to choose their services and products even if you don’t need them. Always do your research.
Many banks offer business checking accounts for free, with a minimum balance requirement and a limited number of transactions. As your business and clientele base grows, you may need to change the type of checking account your business uses. While enhanced accounts might also charge a fee, the benefits of being able to handle an increased number of transactions efficiently and having access to more bank services offsets the cost.
Make sure you have the documents you need to open a business bank account. Having your EIN and an approved copy from your state of your Articles of Organization is a good starting place.
The Right Credit Card to Start a Loan Broker Business
A business credit card enables the online transactions and payments your new loan broker business will incur. With business credit cards, there are no corporate financial reviews every two years and your line of credit can never be turned into a term loan. It’s always revolving and can be subject to credit limit increases as well.
The way the minimum payment is calculated with a business credit card is based on the principle (1.5 – 3% monthly balance) plus interest (0% for 6-12 months) depending on the card issuer.
As your business continues to grow and expand, having access to credit is a must. A business credit card with a high limit, a low annual percentage rate, beneficial rewards and a way to build business credit while protecting personal credit, is a card definitely worth having.
To learn more about the application process and what you should consider when choosing the right credit card check out this article from Credit.com.
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In order to become a commercial loan broker that is recognized in the industry, you will need to develop a strong brand. An effective brand strategy gives you a major edge in the increasingly competitive commercial loan industry. Think of your brokerage’s brand as your promise to your client. It tells them what they can expect from you and the kind of service you provide, and it differentiates you from your competitors. Your brand should be created from who you are, what your business is, and what you want your business to be.
Defining Your Brand
Figuring out how to become a commercial loan broker is a journey of business self-discovery. Defining your brand can be difficult, time-consuming and uncomfortable. It requires, at the very least, that you answer the questions below:
- What is your brokerage’s mission?
- What are the benefits and features of your loan services and products?
- What do your clients and prospects already think of your company?
- What qualities do you want your clients, associates and prospects to associate with your company?
Do your research. Learn the needs, habits and desires of your current and prospective clients. Because defining your brand and developing a brand strategy can be complex, consider leveraging the expertise of a nonprofit small-business advisory group or a Small Business Development Center or read about the Commercial Loan Broker Institute’s Branding Package.
The visual foundation of your brand is your logo. Your website, packaging and promotional materials should include your logo. Put it on everything! You want a logo design that communicates your brand with your target audience. You also want your logo to stand out and be 100% original. Make it colorful, make it bold, make it unique to you and make sure it’s recognizable so you stay at the top of mind with clients, lenders and referrals.
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Market Your Services
With all the deals you’ll be working on, it’s easy for things like marketing to slip through the cracks. But when developing your strategy for how to start a loan broker business, always realize that marketing is what keeps providing you with a steady stream of clients. Without proper marketing that makes you looks like an industry leader, you won’t be able to take advantage of loan broker business opportunity to the fullest. To learn more about marketing your commercial loan broker services, and how the Commercial Loan Broker Institute can help, check out our full service marketing page.
Build Relationships and Your Clientele
People respond better to those that they trust. All your branding and marketing will help aid in building your clientele and referral network, but it’s crucial that your potential clients have confidence in you as a business loan broker. The best way to build this trust is to focus on continual interaction. Share your knowledge, be a steady source of business information and show them that you are a leader in the industry. When your clients know that they can rely on you, they will return to you every time. A faithful customer is one that trusts you and your brokerage over all others.
How to Be A Loan Broker Who Knows Everyone
When looking at how to become a commercial loan broker, realize that you’ll have extra networking work to do when compared to other businesses. This is because you’ll need to create a network of financial institutions and a network of businesses that need loans. Start on the supply side of things so that banks and credit unions will know that you’re looking to help them make some money. Then begin on the demand side to put people in touch with the funding that they may need.
To make sure that you’re not wasting time, it will be important to create a system of pre-qualification that will help you know who is ready for a loan and who is just hopeful that they’ll get a loan. Evaluate receivables, assets, and whatever collateral may be available in addition to the current state of their credit.
For more information about networking and building your client base, as well as your centers of influence be sure to read articles such as 7 Steps to Building Productive and Profitable COI Relationships, Building Your Lender Network One Step at a Time, and 5 Steps to Building a Smart Referral Network.
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Get Your Pricing Structure in Place
Without having proper fee agreements in place, starting a commercial loan broker business means nothing. There are so many brokers that don’t have the proper worded fee agreements in place when operating their business. Agreements are meant to protect the broker’s business and, more importantly, insure the commissions that are to be paid. Without having this agreement in place, it exposes your commercial loan business to penalties.
You don’t want to be a broker who tries to get an offer to a lender before any fee agreement in signed by their client. This of course could cause a problem once the client is briefed on who the lender is. That is why it is always best to get any and all agreements out of the way before a broker spends too much time on any given deal.
To figure out what to charge for your services, you’ll want to know what the local demands for your services are going to be. This will give you an idea of how much of a percentage of the loan amount is that you’ll be able to charge as a fee. Most commercial loan brokers negotiate a percentage that is between 1%-2.5% of the loan. It’s traditional that larger loans will have smaller commissions. Some brokers may also charge an application fee for services rendered at the time of the application. In the U.S., the average application fee is $2,000.
Office Space To Start A Loan Broker Business
Choosing the right office space for your loan broker business is an essential component to running a successful business. There are a few options when it comes to an office. Working from home is a popular choice among commercial loan brokers. It saves you time because you don’t have to commute anywhere, and it saves you money because you don’t have to pay any rent.
However there are a few set-backs. Clients and lenders may be less than pleased to meet you in your home. Having a home office may come off as not so professional. But, because we live in a digital age, you may be able to get away with having video conferences and meetings rather than in-person ones.
Another option for office space is of course renting a space. There are many pros and cons of having a separate office space to conduct your loan broker business and we’ve written an entire blog article about it!
Don’t Let This Amazing Business Opportunity Pass You By!
If you’ve ever dreamed about owning your own business, being your own boss, working on your own time and making a great living doing so, then don’t pass up this loan broker business opportunity that’s waiting for you. Becoming a commercial loan broker requires little more than the will and passion to succeed and the right commercial broker training to turn your dreams into a reality.
The Commercial Loan Broker Institute is a one-stop-shop for all your commercial loan broker business needs. We offer an unparalleled commercial loan broker training program, comprehensive branding, marketing and web design, and ongoing mentoring and support to help you become a successful loan broker.
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