When you're procuring funding for your business, business loans may come up as a frequent option for obtaining the cash you need. But it's important to understand all of the costs involved, as it can essentially impact what you pay out in the end. For instance, the way your broker is paid can affect the cost of your loan. Instead of wondering how a broker get paid, you should instead aim to gain an understanding of how business brokers get paid. When you're considering a small business loan, it's important to consider every expense, including brokers' fees. Here are some common brokers' fees to consider:
Brokers generally get paid based on a percentage of a loan that is funded successfully. This payment is referred to as the success fee, which is similar to the commission fee that real estate brokers get paid. For example, Original Funding receives the standard commission rate of 5 percent per every successfully funded loan.
Some firms do not charge brokers fees, while others do. For example, borrowers that use Original Funding's services can expect to pay nothing in brokers fees. As a small business online loan platform that connects small business owners with alternative lenders, Original Funding doesn't focus on getting fees from the borrowers the way other lenders do. Instead, Original Funding only gets paid directly from lenders. This sets the company apart as other loan brokers typically charge fees. When you're dealing with a broker, you want to make sure that the fees you're being quoted mirror industry standards. Do your research and know current rates before you commit to any loan.
Most small business loans will carry an interest rate that you can expect to pay. This interest rate is charged for the convenience of receiving the money you needed as a lump sum to run your business operations. Loan interest rates add to the principal you owe, and over time that can make quite a difference on what you're actually borrowing. This fee is specifically paid to the financing company or lender and is crucial to understand since it can quickly increase the amount you owe. Thus, it's important to understand the terms of your contract. For example, a 3 percent interest rate with a term of 30 days is actually an annual percentage rate of 36 percent since 3 percent is compounded every month, not year. This can mean the difference of thousands of dollars on just a $10,000 loan. You'll also want to understand if your interest rate is variable or fixed.
Other fees that you may expect for your business loan involves an origination fee, underwriting fees and closing costs. Some lenders charge the origination fee for processing your loan. This fee is part of the upfront costs of your business loan. You may have to pay an underwriting fee if the broker you work with has an underwriter who verifies pertinent information, such as your tax returns or bank account statements. Closing costs cover expenses for servicing the loan, including appraisals or loan-packaging fees. It's also important to understand if there are any pre-payment penalties involved. Thus, it's vital to be clear on all the costs involved with your loan.
Understanding how your business broker gets paid is essential to know what costs you will incur during the origination and life of your loan. You also want to be aware of how the amount of the loan and the length of time you will use it will affect what you owe in interest in the end. By taking the steps to understand all of the costs involved with your loan, you can borrow responsibly and know what to expect.