Need Expert Advice? Choose Your Expert Carefully

Many small business owners seeking financing have recognized the value of using professional advice of an intermediary to help navigate the path to financing.   But caution is needed when you make this choice, because many business people have become victims of inept or unscrupulous loan brokers – loan brokers who either waste valuable time to conduct a hopeless search for capital or who collect fees that are undeserved and never earned.

Loan consultants play an important role in today’s banking environment.   With the consolidation of hundreds of banks and the introduction of many of new financing products, entrepreneurs cannot be expected to keep track of the constantly changing financial marketplace.

The reduction in the number of lenders has led to the rise in the ranks of financing consultants, most of who focus on specific niche financing products.   These consultants are often referred to as “packagers,” “intermediaries,” or “brokers,” and are supposed to be positioned to provide small businesses with the expertise of how and where to access financing.   The value of these services is measured by how quickly they assess your needs, develop a strategy to fulfill those needs, and accomplish what is proposed.    

Any consultant willing to work on behalf of the borrower for several months without a retainer purely on a contingency basis, is usually worth everything paid to them – nothing.  

Because borrowers can be fickle or coy, seasoned consultants will not make large time investments without a tangible commitment on the part of clients in form of monetary deposits. These consultants have successfully raised many millions in loans for borrowers who changed their minds, resulting in no compensation for the considerable effort.

But before writing a check to engage these consultants, the borrower should take the time to validate their capabilities in successfully obtaining loans.     Does their track record match their confidence about how well they will accomplish their mission?   Checking references could save the borrower from an expensive and frustrating exercise in futility.

First, the borrower should request a list of references from the consultant.   In contacting businesses that engaged the services of this consultant, the borrower can determine how well the consultant performed.   Ask those references pertinent questions:

Did the business obtain the financing it needed?  

If not, why not?     If so, was the time frame reasonable?  

Did the consultant communicate with the business on a regular and informed basis?  

Did the consultant have a firm grasp of the company’s objectives, and were those objectives met due to the efforts of the consultant?  

Did the financing offer close?

Did the loan closing cost the amount estimated by the consultant?

The borrower can then ask the consultant for references in the lending community. Obviously, the consultant will not permit the borrower to contact any potential lender that may be the target of the loan proposal. However, the borrower should be permitted to speak with other lenders, outside the scope of the proposed deal, to which the consultant has referred transactions.   Ask the lender pertinent questions:

How well does the lender know the consultant or their work?  

How many transactions has the lender closed from the consultant?

Does the lender rely on the consultant merely for referrals, or does the lender express confidence in the consultant’s ability to analyze potential deals?   In other words, does the consultant’s recommendation of the transaction count, or is the consultant only throwing darts at a wall?

Finally, the borrower should determine whether the consultant is a member of any trade associations. Membership in such organizations as the Chamber of Commerce, the National Federation of Independent Businesses, or other groups may be indicative of the consultant’s primary business focus or efforts to associate with a group that will maintain professional standards.  

These memberships are not necessarily a qualification to finance your business, but they can be indicative of the success and standing of the consultant in the industry.   These groups rarely provide references, but the borrower can verify the claimed membership status of the consultant.

The borrower should remember that the consultant is not the decision-maker for the loan request.   Rather the consultant prepares the application and helps structure the transaction.   However, after selecting the lender and presenting the case, the consultant loses control of the timing and decision involved.  

Most lenders commonly disregard the time constraints of their customers. Worse, if the loan needs to be reviewed by a government guarantor, such as the SBA, the lender may not control of the deal.   Everyone is in a hurry.   As long as the consultant demonstrates diligence in performing specific responsibilities, the consultant should not be blamed for the action of others.

These consultants are business people, too.   It is not unreasonable for consultants to request the borrower to engage their services with a written agreement, and to require a retainer as an expression of commitment on the borrower’s part.   Services and advice cannot be repossessed, and the consultant should not be penalized for changes in the borrower’s situation or strategy that renders those services and advice useless.

To be cautious, the borrower should understand and agree to the compensation expectations of the consultant before work begins on the borrower’s behalf.   The consultant’s willingness to work on a contingency may sound like a good arrangement for the borrower, but it also may indicate that the borrower is employing an inexperienced party to work on the loan application.   Borrowers should beware of people who can make a living collecting non-refundable $250 application fees.

A reasonable consultant will not ask for a retainer unless confident about successfully completing the borrower’s deal.   The prospects of obtaining a loan cannot be reliably predicted without a thorough review of the borrower’s financial statements and other pertinent data.

Loan consultants can easily create value for a business.   A good consultant can permit the borrower to concentrate on their company rather that hopping through twenty wrong banks.   Approaching the wrong lender creates a long list of credit inquiries that will alert the next lender who turned down the deal.  

Borrowers should be willing to pay for quality services and should take the time to know who is capable of being engaged for this important assignment.

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