Remember the beginning of the film American Hustle, when Irving Rosenfeld and Sydney Prosser, played respectively by Christian Bale and Amy Adams, promise to secure loans for the broke and desperate in exchange for an upfront fee?
Needless to say, the loans never appeared. And that scam, 36 years later, is alive and well, according to a story in today's Wall Street Journal. Entrepreneurs are the preferred target, sometimes because their unrealistic optimism can make them blind to warning signs that could indicate a scam.
"If a broker is trying to charge you an upfront fee or lock you into an exclusive that they're the only ones who can help you raise money, that's a red flag," says Ami Kassar, founder and CEO of Ambler, Penn.-based loan broker MultiFunding.
According to the Journal, a record 53,833 complaints about advance-fee loans and brokers were filed to the Federal Trade Commission last year. That's up 25 percent from 2012. Most of the complaints are about the exact same scam Irving and Sydney played--loans that never showed up even though would-be borrowers paid fees to secure them.
Some of the increase is due to the fact that the FTC has been increasing the number of law-enforcement agencies, according to an FTC spokeswoman. Don't want to fall into the same trap? Kassar says there are a number of warning signs that entrepreneurs should be aware of when using a loan broker.
Here are three:
1. Upfront payments and exclusives. An upfront payment, or an exclusive, can sometimes be legitimate for a larger or complicated transactions, says Kassar. That's if you’re trying to raise, say, $15 or $20 million. For smaller transactions--say those of under $5 million--Kassar says upfront fees and exclusives "should not be tolerated, period."
2. No choices. "The broker is going to be quick to draw the loan where they can get paid the most and close the fastest," says Kassar. "But a good loan broker is always going to show you some options and alternatives." Kassar might recommend that a borrower attempt to get a Small Business Administration-backed loan, even though it can be slow, because it can be much cheaper than other options. If that fails, he'll help the entrepreneur explore more expensive loans.
3. Beware the merchant cash advance. Merchant cash advances are offered by a whole host of alternative lenders, and in some situations, they're just what an entrepreneur needs. But Kassar says those cash advance-style loans offer brokers commissions of up to 20 percent. Those commissions are paid by the borrower, and the broker doesn't have to disclose them.