Capital

Con artists target capital-hungry small companies. Don't be the next victim.

A few years ago Richard Gould was convinced that his small chain of drive-through restaurants was perfect for franchising, thanks to its low cost structure. But before he could expand, he needed to raise money.

So Gould answered an advertisement run in an industry trade journal by a company claiming to have capital available to invest in promising growth businesses. "They asked me for a $60,000 fee up front, but I've been around awhile and refused to pay that much," he says. Ultimately, though, he paid $18,000 in the hope of attracting as much as $3 million from investors the advertiser allegedly represented.

Once the company had Gould's money, things changed. "Before I paid the fee, everything seemed so professional on their end," he says. "But once I paid that $18,000, I could never get anybody on the phone--or if I did, it was a secretary, who told me that my contact was traveling on business out of the continental United States or that he would call me back later, which he never did."

Sadly, Gould's story is far from unique. Today's financial markets are riddled with con artists and incompetents who prey on capital-starved business owners and consumers, promising them every variant of easy money. It's hard to say just how many business owners are victimized by those scamsters, but here's one indication: more than 100,000 people contacted the Better Business Bureau during 1994 and 1995 to request a guide about common money-broker scams that target businesses.

While money-raising scams vary, they usually share one common element: a demand for up-front fees, which can range from hundreds to many thousands of dollars. Since the customers don't stand a chance of gaining the capital they need, they wind up in worse financial shape than ever. Some disreputable money finders disguise their offers so that they seem to suggest the involvement of the Small Business Administration, and others promise to help attract venture capitalists or angel investors. Still others "guarantee" approval for bank credit lines or corporate credit cards. The con artists make their approaches by telephone, in print advertisements, through E-mail, or sometimes in person at trade shows or industry conferences.

The bad news: such scams are more common than ever. "We've really seen an increase of business-related financing fraud since the late 1980s," notes Dan Parsons, a vice-president of the Better Business Bureau of Metropolitan Houston. "It's a combination of a lot of different factors: the last recession; more people being laid off, starting their own companies and needing financing help; and the development of the Internet." (The Internet's great charm for scam artists is that it allows them to approach potential victims anonymously--while avoiding mail-fraud charges if caught. Most consumer advocates say it's safest to avoid all Internet financing advertisements.)

Sometimes, so-called money brokers aren't crooks; they're just incompetents no better qualified to find money than their customers are. Either way, business owners lose out if they've paid large up-front fees. Parsons recalls one case that revolved around a lawyer who set up shop as a loan broker. The problem: he had no special contacts or expertise in the field--and never managed to raise any money in return for his fees.

Although there are many legitimate financial intermediaries, small-business owners can never be too careful about checking out a money finder's credentials-- before paying any fees. "It may seem obvious, but you've got to get the names of customers who have received capital with the money finder's help--and then you've got to check out those customers," emphasizes Shirley L. Rooker, president of Call for Action, a nonprofit consumer hot line based in Bethesda, Md. "Don't just call the references on the phone; make sure they're legitimate companies as well, and not just 'shells' set up to fool potential victims."

Besides checking references, Parsons advises, take some additional precautionary steps. Before retaining a professional to help you raise money, check with the Better Business Bureau and your state attorney general's office to see if any complaints have been lodged against his or her company. Then check the phone book to make sure the company has a listing; fraudulent businesses change their names or locations frequently to escape bad reputations. Next, make sure the business has a physical operation and visit it; if possible, talk to the landlord about the company. Then ask the money finder about his or her specific sources of financing--and call the sources to verify the information.

As a final precaution, make sure your lawyer inspects all contracts before you sign them. Scamsters, of course, will try to skip the contract stage entirely. Be wary. "It's only natural for both parties to clarify their expectations in a written contract or letter of agreement. If the money finder won't write one, then you should do it, spelling out how much you expect to pay and, in complete detail, what you expect to receive in return," explains Mark E. Young, a partner in the Boston law firm of Peabody & Arnold. If the other party refuses to sign, look elsewhere.


Too Good to Be True

Raising money for your company? If you're thinking of engaging the services of a money broker, watch out for these red flags:

"Guaranteed" loans, credit, or venture-capital investments. There's no such thing as guaranteed capital. When it comes to capital searches, any words that suggest certainty are tip-offs of potential problems.

Up-front fees. Given the prevalence of scams, many--although not all--consumer advocates agree that the safest course is to avoid any deal that involves an up-front fee. Instead, try to negotiate fee structures tied to the amount of funds actually raised.

Pitches over the Internet. The Net is one of today's fraud vehicles of choice, since crooks don't have to worry about charges of mail fraud if they're caught.

Nigerian-letter scams. One "easy money" scam consists of letters sent to businesses or consumers, saying money is available for them from distant locations, often Nigeria. Con artists then request bank-account information (so they can loot accounts electronically) or demand large up-front payments to cover expenses.


Did you know that...

...if you've been scammed, you may be able to gain assistance by contacting--

  • Your state attorney general's office,
  • Your local Better Business Bureau,
  • The Federal Trade Commission (202-326-2222),
  • The local branch of the U.S. Postal Service if a solicitation through the U.S. mail was involved, or
  • The not-for-profit Call for Action (301-657-8260).

Jill Andresky Fraser is Inc.'s finance editor.