You have made the decision to look for additional finance to grow your business. Now comes the part where you need to find someone who can help you source the right finance.
Importantly, whoever you choose will need to be someone with whom you work on a regular basis – someone you trust and get along with.
If you’re new to the world of business finance, how do you go about finding a finance broker to help you grow your business?
Here are our 7 tips for finding the right finance broker for your business:
- Are they experienced?
- Are they FCA regulated?
- Responsible lending
- Check what products they have access to
- Are they tied to a specific lender?
- Ensure they’re insured
- Be aware of fees and value for money
- In summary
1. Are you experienced?
When you think you have found a broker, have a look on their website and check their case studies/resources. Make sure that those case studies/resources are for genuine customers. You also need to review those clients. Do they demonstrate that the broker has experience with other businesses in your sector?
Make sure you tell them about your business. A broker worth their salt will want to know things like; the legal form of your business – are you a limited company, an unincorporated business or a partnership? They will also ask you about your management team, your main business activities, your business premises, assets you own such as machinery and equipment, and any existing financial arrangements, including any overdrafts or loans in place. All this information will help the financial broker match your business to relevant lenders. Be concerned if they don’t go into this depth of detail with you.
2. Are they FCA regulated?
A lot of small businesses don’t realise that the commercial finance market is largely unregulated. This means that you don’t necessarily get the protections that you might be used to in your personal finance matters. This includes such things as a Financial Ombudsman, or an overarching obligation to Treat Customers Fairly.
Although many unregulated commercial finance brokers provide excellent service, a regulated broker is probably a better bet.
3. Responsible lending
A good broker should be responsible in the way they source your finance. After all, they’re not doing you any favours if they help you to take on debt funding that you are unable to repay. They should be checking how you would repay the loan, including whether you would offer a legal charge over your assets such as property as collateral to secure improved terms (meaning that if the business is unable to repay the loan, 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.
You in turn need to be open about your business and disclose to the broker any so-called ‘adverse information’ such as any county court judgements or insolvencies connected to the directors or owners. Although these factors may affect the availability and cost of finance, often a good broker will still able to help you.
4. What products are on offer?
There’s a wide range of finance options available to you. An experienced commercial finance broker should be able to identify the most appropriate one for your business needs. Options the broker may suggest could include:
- Bank loans: Your first thought about funding for your business might be approaching your bank for an overdraft or a term loan. Your broker will want to check whether you have already considered this in case it is your best option.
- Commercial loans: Other than your bank there are a plethora of lenders to choose from including peer-to-peer lenders, for both commercial loans and revolving credit facilities.
- Peer-to-Peer loans: 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 faster and, in some cases, cheaper.
- Asset finance: Can often be your most suitable way to finance new business equipment and machinery. Rates vary considerably depending on the type of asset, the type of business, and whether you keep the equipment. However, it may be cheaper to obtain.
- Factoring and invoice discounting: These options allow you to raise money based on your unpaid invoices to customers. The lender will typically pay you circa two-thirds of the value of the invoices upfront. You will get 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.
- Sale and leaseback: A form of asset finance where you sell an asset you own to a finance company and hire it back. It’s quite a specialised market and terms can vary considerably.
- Contract hire: This is ideal if your business needs to run a fleet of company cars, delivery vans or other vehicles. It can provide you with fully serviced and managed vehicles.
- Commercial mortgages: There’s a wide range of mortgage lenders. Rates vary depending on your 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 – are expensive compared to commercial mortgages, but can still be your best solution in some circumstances.
Here’s a full list of available growth products.
5. Are they tied to a specific lender
Not all business finance brokers are equipped to deal with the full range of types of finance. Many specialise in asset finance or property only. That’s fine if it’s clear what type of finance is needed, and the broker is a specialist in that product. Otherwise, consider approaching a firm and choosing a broker who can advise on the full range of business funding options from a wide selection of lenders.
If they are not FCA approved, they won’t have access to high street bank and other lenders who have the same criteria.
Using a commercial finance broker that has access to a wide range of finance companies, some of which only work through brokers, is important to ensure you find a competitive asset finance deal.
Many commercial finance brokers are closely tied to a particular lender, may be owned by one or they may even be a lender themselves. If a commercial finance broker fancies lending to you, it’s against their interests to refer you to a more suitable alternative finance provider.
You should look for the widest choice possible in a broker so that you can be sure you are getting the best deals available.
6. Ensure they’re insured
Check that the broker you are considering has professional indemnity insurance to back it up. If something goes wrong that’s not your fault, and your business suffers as a result, there’s no point pursuing a claim against a commercial finance broker if they have no assets or insurance. You’ll just be throwing good money after bad. Professional Indemnity insurance gives more potential recourse if you or your business suffers as a result of poor advice or mis selling. If they have insurance of this kind from a reputable insurer then it’s also a sign that the insurer has taken a look at the commercial finance broker’s credentials before choosing to back them, giving you another level of reassurance that you are dealing with a reputable business.
7. Know the fee structure
Does the broker charge any fees in addition to earning any commission from the lenders that it recommends?
If you’re working with a business finance broker you should confirm you are happy with costs, terms and security requirements before you proceed.
Check the overall cost of the loan offers including any extra charges, in addition to the regular monthly or quarterly payments. These charges might be described by commercial lenders arrangement, 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.
Read the terms of the agreement, which for asset finance might include conditions regarding the return of hired equipment, minimum periods or ‘balloon’ payments (a higher lump-sum payment at the end of the agreement).
Also satisfy yourself of the any security requirements, such as a charge over business’ personal guarantee, your own or directors’ personal property.
Reassure yourself that the terms of business lending are attractive enough to allow you to go ahead without a significant risk of you not being able to make the repayments.
8. In summary
Your broker should be experienced, flexible, deliver value for money solutions and follow proper procedure.
Your relationship with your broker should be open, honest and transparent. And remember that this is a two-way street.
For more information on choosing the right broker and how we can help you find the right funding solutions for your business give us a call on 0203 327 0567 or email [email protected]. We will be happy to help.