You finally came up with that million-dollar business idea! No more nine-to-five shifts, working for a boss you don’t see eye to eye with. Your idea fits your lifestyle and passions, and you can’t wait to get it up and running. Your business plan is complete, and you’ve located the perfect storefront that’s up for lease. Although you don’t have enough cash reserves to finance this endeavor, that’s okay. The next step on your to-do list is to secure a business loan to get you going.
While this is an exciting step that will make your business dreams a reality, it is important to keep your guard up. Don’t let your emotions get the best of you because people will try to take advantage of your situation. Business loan scams are happening more frequently, so knowing what to look for is essential. Here is a list of business loan scams to avoid.
A regulated and legitimate lender will never ask you to pay money upfront. A scammer will devise any excuse to get money out of you. They may claim that the fees are for credit checks, application fees, processing fees, one-time fees, or anything else they can think of. Usually, they will promise a low-interest rate on the loan after they collect fees from you. However, once you pay these fraudulent fees, they will not issue you a loan, and you will lose the money you paid.
A legitimate lender may have fees once the loan is issued, but never before. This fee is likely an origination fee for taking out the loan, and it will either be deducted from the loan amount or consolidated into your monthly payments. It will not be a separate payment that you give the lender out of pocket. If a lender asks you for money before the loan is funded, don’t give them a dime; find a different lender.
Fraudulent Loan Brokers
A fraudulent loan broker is very similar to a fraudulent lender by requesting upfront payments. These brokers will try to make finding a lender sound like a time-consuming, complicated process. They will make it sound like you won’t be able to find a lender on your own, and they will claim they are experts in this matter. A swindling broker will claim they can connect you with the perfect lender for a fee. Then, they will take your money and disappear. You will have lost your money and will be no closer to securing a lender. Don’t let them scare you! Finding a lender is not difficult, and you don’t need their help. As a general rule, if someone is asking you for money upfront, it is likely a scam.
The Lender has No Contact Information
Be wary of lenders without contact information. They might have a professional-looking website, but if there is no way to contact them, that is a huge red flag. Ensure their website has a working email address, a legitimate phone number, or a physical address you can access. If they called you first, be sure that when you call them back, the number goes through to the correct party. If you cannot get in contact with the lender, they are likely frauds.
Going further, if you are corresponding through email, look at their email address. You may want to investigate further if they do not have a corporate email address. For example, if their email address is from Gmail, Yahoo, Hotmail, or some other generic platform, that is not a regular practice.
Another common practice scammers use is to find a legitimate lender’s email address, create a new email address and change just one letter. If a lender emails you first, double-check their website and make sure the email address matches. It is always better to take a few extra minutes to verify the validity of the lender than to lose money in a fraudulent scam.
If a lender guarantees you will be approved, they are likely scamming you. There is no way that they can guarantee a loan for every single business. If they advertise a guaranteed loan, it is a binding contract they must deliver on, so be wary if they use phrases like, “No Credit? No Problem! Guaranteed Low-Interest Loans!” You should be especially wary if the lender contacts you first, offering a guaranteed loan. This is undoubtedly a scam. The lender cannot guarantee a loan without your application and a credit check.
If an offer sounds too good to be true, it probably is. If a lender offers a rate significantly lower than its competitors, it is probably not legitimate. While they want your business, there are limits to how low of a rate they can offer you while still profiting. Trust your gut when something sounds good to be true.
Credit Repair Scams
When applying for a business loan, your lender will examine your credit score first. If you have poor credit, obtaining a loan will be difficult. If you have a solid business plan, but your credit score is low, and you are denied a loan, do not let frustration cloud your judgment. Swindlers will prey in this situation. They will falsely claim that they can raise your credit score by 150 points overnight. This is impossible. Keep a level head and look for legitimate steps to raise your credit score. Again, play by the rule that if something seems too good to be true, it probably is.
Peer-to-Peer Lending Scams
Peer-to-peer (P2P) lending allows individuals or businesses to obtain a loan directly through another person. This cuts out the middleman of the bank or financial institution. As a result, P2P lending has become increasingly popular, especially for borrowers with poor credit who would not qualify for a business loan through a bank. In addition, by going through a P2P lender, you will probably get your loans faster, and you may bet better interest rates.
There are some legitimate, vetted P2P lending sites. However, Craigslist, Facebook Marketplace, Instagram, or Reddit are not that. If you see a Craigslist post offering business loans, run the other way. If you choose to pursue a P2P loan, be sure to use a trusted and regulated website.
Do not rely on social media communication to obtain a loan for your business. These P2P scammers will ask for money and personal information upfront. So be on the lookout to protect yourself and your assets.
There are a few other warning flags to be aware of. First, if the lender is aggressive or comes across as a salesperson, they might be trying to scam you. If they are pressuring you into accepting a rate or threatening that it will only be offered today, that’s a red flag. An honest lender is going to offer something realistic for you.
Next, if a lender is asking for personal information, be wary. They will need some information to run a credit check, but they will never ask for passwords or banking information.
If a lender is inconsistent with their information, keep your guard up. If they are not registered with the Better Business Bureau or have poor ratings, look elsewhere for your loan.
Consult an Attorney
Now that you know the scams to look out for, you can safely look for a certified lender for your business loan. The degree of difficulty will depend on your cash flow, time in business, loan amount, credit score, and business plan. Business loans are available through banks, online lenders, credit unions, and peer-to-peer lenders. If you are unsure of where to start, contact a local attorney.
Johnson May is a local law firm with experienced business attorneys ready to help you. Our trusted attorneys will work with you through every step of your business needs, including creating your business plan, attaining your LLC, applying for your loan, constructing your tax strategy, protecting your assets, and more. So don’t let your stress pile up—reach out to Johnson May!