As an entrepreneur, you're likely an eternal optimist. A dreamer with big ideas and the work ethic to make them happen. You'll do whatever it takes to turn your business idea into a reality, but you may need some help-and funding-to get there.
Unfortunately, a growing number of illusory individuals and companies operating both within the United States and abroad aim to take advantage of vulnerable small business owners, stealing money or personal information by posing as legitimate lenders, loan brokers, or other "helpful" small business funding services.
While there are plenty of legitimate and reputable funding options for small business owners looking to make their dreams a reality, these con artists can often hide within their ranks.
If a loan or service sounds to good to be true, it probably is. Be wary of these five red flags that your exciting funding opportunity may actually be a dangerous scam.
1. Asking for Money Up Front
No lender, broker, or loan officer should ever ask you for money up front. Period.
If in the process of applying for a loan you're asked for a down payment, a registration fee, a credit check fee, or any other form of upfront financial contribution, it's time to say goodbye and move on.
Legitimate business loan brokers work for free up front, taking a percentage commission from the lender only after a deal has been finalized. If you give a supposed loan broker upfront payment of any kind, don't be surprised if you never hear from the broker-or your hard earned cash-ever again.
2. Lack of Physical Address
Any time you are working with a lender, always ask for their physical office address. This should be a real mailing address and not a P.O. box. Although there are certainly plenty of legitimate online lenders in the small business financing space, all of these still have a physical office address.
If the supposed lender or loan broker is unable to provide you with a physical address that you can search and verify, they may be operating a business loan scam from another country outside the U.S.
3. Cash Advance Lenders
Entrepreneurs in a hurry to fund their businesses can be easy prey for unscrupulous lenders offering questionable "startup" loans. But the moment you hear the words "cash advance lender," your internal red flags should start going up. Most of the time, cash advance lenders are synonymous with unmanageable rates and impossible terms.
While the premise of avoiding lengthy paperwork and credit checks is certainly tempting, business owners who fall into these cash advance scams pay for their haste with impossible interest rates and time frames that can kill a business before it is even off the ground.
As with any rule, there are certainly exceptions to the cash advance scam. Many reputable online lenders offer a merchant cash advance, which can be a good option for seasonal businesses or owners with poor credit.
Before you sign the dotted line on any business loan, be sure that you understand the terms completely and are confident in your ability to make regular loan payments in the given time frame. Be certain you know the true cost of the loan, which means you need to know the APR and not just the interest rate. APR can be easily calculated with an online APR calculator. If you can, have a third party financial advisor not affiliated with the lender explain the terms to make sure you are receiving complete and accurate information.
4. Business Credit Repair
Particularly if you are a brand new startup, no lender expects you to have established good business credit. But there are plenty of predatory service providers out there who would like to convince you otherwise. These business credit or credit repair services will offer to "fix" your business credit to make you more eligible for a business loan. Mostly, though, they're just out to take your money.
These services should not be confused with personal credit repair, which you may or may not need depending on your situation. If your credit score is above 650, you should have a fair number of options for business loans. If your personal credit score is in the 500s or lower, you may benefit from some credit repair assistance. However, make sure you are working with a reputable service, as there are many scams in this realm as well.
5. "Guaranteed" Loans
No legitimate lender will every guarantee your approval for a small business loan before you have applied. Period. If any person guarantees that you will qualify for a loan before having received your application and reviewed your financials-especially with such promises as "regardless of low or no credit"-you can assume that they are up to no good.
Thanks to recent growth of the online alternative lending sector, small business owners have more options than ever when it comes to securing a business loan. Always do your homework and make sure that you are working with a reputable operation.
Trust your gut. If you get a bad feeling or are uncertain about a certain operation, contact the Better Business Bureau in your state for more information.