When trying to start a business, you want to make sure that you enter a market with a lot of demand and potential for growth. Right now, one of the best avenues is a business loan broker opportunity.
Business loan brokers are the ones putting entrepreneurs in touch with lenders. Banks tightened their lending requirements substantially after the housing crisis, and since that time, business loan brokers have been pivotal in matching private funds to growing business.
However, if you want to get into this industry, there is some work to be done to lay a groundwork for success. Many entrepreneurs have asked us, “how can you get started?”
Below we will outline the various steps you can take to seize the business loan broker opportunity. Then, we will describe our comprehensive broker launch program so that you can access the tools necessary to make your brokerage a success.
Invoice Factoring – Business Cash Flow
One problem that many small companies face is maintaining positive cash flow. In most cases, this struggle is made worse by clients having extended payment terms. When a business has too many outstanding invoices, it can stall operations and put it into a financial bind. That’s where invoice factoring comes in.
With invoice factoring, a third party assumes the balances owed by clients and pays the business directly. For example, if an enterprise has $10,000 in accounts receivable, then a factoring company will step in and pay a portion of that money (usually around 70 percent) and then bill the clients who owe it. Once the clients pay those invoices, the factoring company pays the remainder, minus a processing fee.
The primary benefit of factoring is that businesses can get immediate cash, even with bad credit or outstanding debts. In most cases, the business can get money the same day or next day, depending on the situation.
The reason for this is because the factoring company only cares about the financial status of the clients. As long as they are capable of paying those invoices, that’s what matters.
Typically speaking, startups and young businesses will benefit from factoring the most, provided that most of their income comes from client invoices. Factoring can help the company manage cash flow better and avoid borrowing to cover outstanding debts and operational expenses.
For those companies that don’t have accounts receivable, or they are for small amounts, invoice factoring is not a viable option. However, even those businesses that are primarily transactional can utilize factoring when a hefty invoice does come in. As a commercial loan broker, you want to measure how much money is in accounts receivable and weigh the potential downsides to see if this option is right for your clients.
Equipment Financing – Expanding or Upgrading a Business
For some companies, equipment is the foundation of their success. Some examples can include construction machinery, restaurant equipment (i.e., walk-in coolers and range ovens), or business-related vehicles.
Just as you would get a car loan to pay for a new ride, companies can utilize equipment lending to pay for this machinery, rather than obtaining a more generic loan. The main benefit of this type of financing is that the equipment is the collateral. If a business fails to pay, they don’t have an outstanding debt – the machinery is repossessed instead.
So, in many cases, equipment loans don’t require much in the way of upfront payment. So, if a company is looking to expand or upgrade its inventory, it can do so without having to provide a ton of capital investment.
One thing to keep in mind is that equipment loans will usually cover up to 80 percent of the total cost – the business is responsible for the other 20. Also, in some cases, companies can lease the equipment for a specific term instead. Leasing is usually favorable when no capital is available, as it requires no down payment. Better yet, the business can buy the equipment after the lease is finished for a much smaller fee.
Owner-Occupied Commercial Buildings
Most companies tend to rent their office and operational space because it’s cheaper to rent than it is to buy a new property. However, owner-occupied commercial real estate (OOCRE) can be a lucrative and cost-saving opportunity for the clients that can qualify. As a commercial loan broker, you will want to assess the potential for OOCRE investment for these benefits.
Revenue Stream – if the building is large enough, the business can rent out excess space and earn money from tenants.
Asset Equity – because the business owns the property, it will appreciate over time, building more equity into the company’s portfolio. This equity can enable the enterprise to grow and expand further with additional lending options.
Tax Deductions – companies with OOCRE properties can write off their mortgages every year, reducing their tax burden. Brands can also deduct furniture and furnishings, which helps make a space inviting for tenants.
While the benefits of OOCRE are excellent, many businesses won’t qualify. As a rule, a company needs excellent credit and payment history. While lenders will usually see OOCRE as less of a risk than other real estate loans, they do want a record of integrity.
Another thing to keep in mind is that the business needs to occupy at least 51 percent of the property and pay at least 51 percent of the mortgage. Beyond that, though, the rest of the costs and maintenance can be fronted by tenants. If the mortgage payment is similar to a lease, it’s a smart move.
Overall, OOCRE is ideal for companies that want to build assets and expand their operations. Because the property can start to earn income, they can offset expansion costs and stay financially solvent. Also, as far as long-term planning, the business can eventually sell the property or maintain it as a property manager to get even more income from it.
Bridge Loans – Fast Financing
Typically speaking, lending is a relatively lengthy process when you go the traditional route. The time from inquiry to cash in hand can take months, which is not always conducive to business operations.
In those cases where a company needs money fast, and they can’t utilize something like invoice factoring, a bridge loan can be the best option. However, bridge loans do come with some significant catches, which you’ll need to relay to your clients as a broker.
Those caveats can include:
Higher Interest Rates – even if your client has excellent credit, these loans come with higher rates no matter what. The reason for this is that they are shorter, so the lender has to mark up the loan to make money.
Short-Term Lending – usually, bridge loans have to be repaid within six months to a year. So, if a business owner isn’t going to be getting money back right away, this option is never a good strategy.
Limited Financing Options – most lenders avoid bridge loans because they are riskier investments. Also, depending on the credit rating of the business, it might not qualify for a larger loan balance. In some instances, companies will have to secure a hard money loan.
If you’re not familiar with hard money loans, that is when the lender is not a financial institution. For example, if a business borrows from an individual rather than a bank. Hard money loans can be a little more flexible, but they are inherently risky for both parties because the money isn’t insured by the Federal Deposit Insurance Corporation (FDIC).