The business financing industry has grown dramatically over the past decade or so. Business owners now have many more options to choose from when searching for the right business loan for their circumstances. Online and alternative business financing companies frequently work with business owners who cannot meet the requirements of traditional options. But this influx of online lenders has consequently opened a larger window for business loan scams.
In fact, business loan scams are so rampant that it’s actually driving business owners away from online lending altogether. You can’t blame them. Scammers often present themselves like any other online lender and capitalize on the widespread need for quick and affordable funding. Numerous reputable online lenders have one-page applications and can distribute funding in a matter of hours, even if the applicant has poor credit. Scammers just have to say the same things as everyone else, which makes them very difficult to identify.
In addition to money, scammers are usually after personal and business financial information. This is why virtually all small businesses (not just tech or finance companies) are constantly urged to invest in cyber security.
But as hard as scammers try to seem legitimate, there are several ways to spot them. Every scammer gives themselves away in some form. In this guide, we’ll explain how to identify scammers and what to do if you find out you’ve been scammed. Plenty of businesses have survived scams and were still able to continue their path to success.
5 Most Common Business Loan Scams
Scammers typically attempt to reach potential victims online. This could be through email, Google ads, social media, or display ads. But some scammers have also been known to contact potential victims through phone calls and text messages.
No matter the channel, most scammers give themselves away by immediately asking for a payment, personal information, or private business information. Thus, you are undoubtedly right to remain cautious before giving money or information to anyone, regardless of how legitimate they seem. Reputable lenders understand this and therefore take extra measures to show their customers that they are not being scammed.
Before you begin your search for online lenders, you must first become aware of the most common business loan scam tactics.
Here they are:
1. Advance Fee Scams
An Advance Fee scam asks you for an upfront payment in exchange for a shockingly affordable and accessible loan. One common example is offering a loan with “0% interest” and “no credit check” but only if you pay an “application fee” first. The scammer might call the Advance Fee a “processing fee” or “one-time fee.” Either way, this popular tactic revolves around asking you to put money down before showing you the application. The victim’s suspicion is clouded by the notion that anyone can qualify. Even if there was no upfront fee, you should always be suspicious of any loan that claims to have no requirements and a low interest rate. These two things almost never go together.
In reality, the cheapest loans have the toughest requirements. The most expensive loans, on the other hand, tend to have the least requirements. Some Advance Fee scams prey on business owners with previous bankruptcies, which is a deal-breaker for most reputable lenders. While you can certainly find loans with low credit score minimums, it’s nearly impossible to find a legitimate loan that says something like “Bankruptcy ok!”.
But Don’t Lots of Lenders Charge Fees?
Another reason Advance Fee scams work is because many legitimate lenders charge application fees or processing fees. But these lenders will not ask for an upfront payment without giving you more information. And it’s usually the traditional institutions that charge the highest or the most fees. Banks, for example, often charge credit check fees, underwriting fees, origination fees, etc. So, if an alleged lender you’ve never heard of asks for a large upfront payment, stay away. This is a red flag, even if the lender makes you all the promises in the world, like promising to refund your upfront payment.
Unfortunately, these “guarantees” or “signed agreements” mean nothing when you’re caught in a scam. Let’s say an alleged lender asks you for a massive fee (tens of thousands of dollars) and produces a “signed agreement” saying that if you didn’t receive the loan, your fee would be refunded. Of course, the loan never comes, and neither does your supposed refund. In this frighteningly common scenario, it’s extremely rare that the victim gets their money back. You could take the case to court but experienced scammers know how to protect themselves from the justice system. A judge’s ruling that you are legally entitled to the refund will likely get you nowhere.
2. Peer Lending Scams
Like Advance Fee scams, Peer Lending scams advertise impossibly convenient loans (low interest with no requirements). But instead of an upfront payment, Peer Lending scams immediately give themselves away by the platform in which they are advertised. These scams come in the form of messages on Facebook, Reddit, Craigslist, etc. And instead of a fake loan company, the message comes from an individual.
Why would someone accept a loan from an individual? Well, this is sort of how reputable peer-to-peer lending platforms like Lending Club and Funding Circle work. Peer-to-peer lending funds businesses through investors, all of whom have their own requirements for revenue, credit score, etc. An investor can buy a whole loan on his or her own or just a portion of it.
Peer Lending scammers claim to be the same investors who buy loans on the aforementioned platforms. They typically ask victims for an upfront payment to close the loan, and/or personal information for a “background check.” In other words, you stand to lose both your money and your identity. All they may need is your full name, date of birth, and social security number.
Thankfully, Peer Lending scams are especially easy to avoid. If you get a message on social media offering a loan, it’s probably a scam. Legitimate peer lenders make their offers exclusively on verified platforms, which have vetting processes to protect against scammers. These platforms will not ask for upfront payments or personal information for a “background check.”
3. Funding Kit Scams
Funding Kit scams offer tips and tricks for obtaining incredibly cheap business loans (sensing a theme here?) or special government grants. They might claim that you qualify or have been “selected” for one such program, which you wouldn’t even know about if you didn’t receive this message.
These scammers essentially ask you to pay them for information. They prey on the widespread notions that finding an affordable business loan is “complicated” and that you have to know some sort of “secret” to access the best options. Both couldn’t be further from the truth. All the information you need about business loan options is available for free, and it’s not difficult at all to find the right loan for your needs and circumstances. The most advantageous loans and the most reputable lenders can be viewed by anyone with an Internet connection. If you have questions, just contact a lender you’re interested in. They’ll answer honestly and for no cost, even if you make it clear that you might not work with them.
As for grants, there’s no special tip or trick for jumping ahead of the line. Grants are extremely difficult to obtain, largely because only a small number of businesses can meet their requirements. Also, no one can issue a grant except for the source of the grant, which is usually a federal, state, or local government agency. These agencies will never, ever call you to offer a grant.
4. Credit Repair Scams
Excellent credit is the number one requirement for an advantageous business loan, credit card, mortgage, etc. For this reason, scammers like to claim they can raise your credit score by 100 points or erase poor credit history in a matter of days. Of course, neither of things are possible. It takes at least a few weeks or months to improve a credit score. And aside from the three major credit bureaus, no one can manually remove negative information from your credit report.
Legitimate credit repair companies do exist. But in most cases, they can’t teach you anything you couldn’t have learned on your own, and for no cost. Besides, you don’t need excellent credit to obtain a reasonably-priced business loan. Many reputable lenders even specialize in business loans for borrowers with bad credit.
In summary, all the best tips for improving credit are available online. There’s no “shortcut” that you’re missing.
5. Fake Loan Broker Scams
Legitimate loan brokers help business owners find the best loans they can qualify for and compile the required paperwork. They save you the time of researching your options online and contacting each lender to see if they’re the right fit.
No legitimate loan broker, however, will ever ask you for an upfront fee for their services. That’s not how loan brokers get paid. Instead, they are compensated through a commission model that gives them a percentage of the total loan after the deal is closed. The most reputable loan brokers will take this percentage from the lender so the business owner pays nothing.
Any alleged loan broker that asks for an upfront fee is unquestionably a scam. You may receive a message or see an ad in which someone claims to be a “consultant” or “agent” who can connect you with a low cost loan. If you inquire, you’ll be asked to pay for a service that is widely available for free. It’s really just another variation of the Advance Fee scam, which is essentially the template for all business loan scams.
2 Common Business Loan Scams After Obtaining Financing
The five previous scams target people who are looking for loans. These next two, on the other hand, target people who have already obtained loans and are currently paying them back.
Here are the most common scams to watch out for after you’ve received a loan:
1. Debt Relief Scams
For one reason or another, many business owners find themselves unable to make monthly loan payments. Two legitimate solutions for this scenario are debt consolidation and refinancing. The former combines multiple monthly payments into one payment. The latter lowers your monthly payment by replacing your current loan with another one with lower interest or longer terms.
Neither solution, however, can dramatically reduce your current monthly payment or forgive the debt entirely. Thus, if you see a message or an ad that promises to “get you out of debt” or “cut your monthly payment in half,” it’s probably a Debt Relief scam. Like the previous scams, Debt Relief scammers also tend to reveal themselves by offering “guaranteed approval.”
If these red flags weren’t obvious enough, these scammers usually ask for an upfront payment and/or personal information. They might claim that they need information to “analyze” your credit file and outstanding debts. The more aggressive scammers will even ask for your bank account number so they can “transfer” your debt to another account. But you know what’s really going on.
If you are having trouble making monthly payments, the first thing you should really do is contact your lender. Since this situation is so common, most lenders will offer several potential solutions, like extending your terms or individual payment plans. It’s not as if the lender is just going to say “Nope, we can’t help you.” Besides, your payment issue is probably due to an uncontrollable circumstance, which happen all the time.
2. Debt Collection Scams
If you fall behind on monthly payments, your lender will contact you to see what the problem is. You might also, however, be contacted by a Debt Collection scammer demanding immediate payment. These scammers use threatening tactics to scare their victims into paying them. They might threaten you with arrest or a lawsuit, possibly even posing as the police or a government agency.
Legitimate lenders do not make outward threats or harass people over the phone. They just want to find a solution, like the examples mention in the previous section. Taking borrowers to court is an expensive and stressful process that most lenders prefer to avoid at all costs.
Another way to spot Debt Collection scammers is the caller’s lack of detail about your loan. The voice on the phone won’t bring up your outstanding balance, interest rate, due date, monthly payment amount, etc. Scammers usually won’t even give you a fake company name. If a legitimate debt collector does contact you, it will most likely be in writing, and the letter will show your outstanding balance and the name of the company.
Obvious Signs of a Business Loan Scam
You’ve probably noticed that all of these scams are very similar. It’s true: They all use the same general tactics and share the same red flags. This is what instantly differentiates scammers from legitimate companies. Scammers have gotten more creative as of late but their contact methods and rhetoric remains the same. If anything, it’s just more understated.
When you know how scammers work, you can literally identify them on the spot. Let’s go over the most obvious signs of a business loan scam:
1. Cold Calling/Messaging
Cold calling and messaging is not common in the business financing industry. Reputable lenders usually only contact people who have already expressed interest in some way (clicked on an ad, filled out a form, etc.) So, if you get a phone call or email from a company you’ve never heard of, a less reputable company is likely the source.
2. Upfront Payments
Most business loan scams revolve around upfront payments. If this isn’t abundantly clear already, no legitimate lender asks for upfront payments for credit checks, processing, etc. Legitimate lenders do charge fees but not upfront, before any sort of service has been performed.
3. No Physical Address
Sanctioned business lenders are legally required to include their physical addresses in their messages. Scammers will either provide a P.O. Box number, a fake address, or no address at all. If you’re not sure about the alleged lender that just emailed you, Google the address.
4. Guaranteed Approval/No Requirements
Alternative and online lenders may say things like “Bad Credit OK” or “Quick Approval.” But this is very different than “No Credit Check” or “Guaranteed Approval.” No legitimate lender can guarantee approval, and while bad credit loans do exist, the lender will still check your credit. Absurdly loose requirements are often a dead giveaway of a scam.
5. Suspiciously Convenient Terms
The best business loans on the market are reserved for those who can meet the toughest requirements. Thus, a legitimate lender can only offer you low interest rates, long terms, or low monthly payments after establishing that you qualify for them. If an alleged lender offers you these things outright, it’s simply too good to be true.
What to Do If You’re a Victim of a Business Loan Scam
If you find out you’ve been scammed, your first step is to report the scam to the Consumer Financial Protection Bureau (CFPB). After the bureau reviews your report, it will most likely be published in their public Complaint Database. If other people have reported a similar scam, the bureau might also take legal action against the scammer.
Next, file a complaint with your local police department. The police probably won’t be able to find the scammer because they typically use untraceable tactics. Having a police report on file ultimately serves as evidence that you quickly took action to get your money or identity back and are therefore more deserving of justice.
If your identity has been stolen, your third step is to report identity theft to the Federal Trade Commission (FTC). Then, contact the three major credit bureaus and request for a fraud alert to be placed on your credit file. Fraud alerts warn prospective creditors that a thief may soon apply for or use credit in your name.
Business Loans Scams: Go With Your Gut
Perhaps the most effective way to avoid scammers is to trust your gut. Many victims of business loan scams were skeptical from the get-go but convinced themselves that this “opportunity” for low costs and lax requirements shouldn’t be passed up. What they failed to remember is that a major benefit of business loans is establishing a long-term partnership with the lender. Reputable lenders want to work with you throughout your whole career. They continuously supply funding as your business grows. But you can’t have this relationship if you’re not 100% comfortable with their service. The right business lender for you should immediately make you feel valued and secure. Scammers never do this, so you can check yourself off their list of targets.