Loans are vital for small businesses looking to grow and build their credit history. Yet obtaining an SMB loan isn’t easy, and many applicants never qualify. Desperate for funding, they turn to companies that promise loan approvals and low-interest rates, but most of these companies are scammers preying on small business owners.

Fortunately, most scammers show the same warning signs. Continue reading to learn what you need to look for to avoid falling for faulty loans.

Understanding Business Loans

Business Know-How explains that legitimate banks and lenders consider two things when reviewing applicants:

  1. Willingness to Repay Your Loan: Lenders need to know that you’re willing to repay the loan. This is typically gauged by your credit history, which itself is comprised of different factors (payment history, and derogatory remarks).
  2. Ability to Repay Your Loan: Lenders need to know you already have the cash flow to make the required monthly payments. Applicants usually have to show three or more straight years of profitability from their business.

Simply put, lenders have specific criteria when deciding who to give loans to. Many people don’t understand how the loan application process works. This, coupled with not knowing the following business scam signs, make them more likely to fall for scams.

The Business Itself

It’s important to always do a bit of research on the business offering you a loan. Some warning signs include:

  • Business Location: If you can’t find the lender’s business address on their site or online, the company is likely a scam. In the United States, businesses are required to register a physical address and telephone number. Also, stay away from companies that offer their services online yet are located outside of the United States.
  • Using a Copycat Name: People sometimes fall for scams because their internet presence seems “legit.” The scamming company has a professional-sounding name and went to great lengths to create a great-looking website. Don’t let these tricks fool you. If the company shows any of the above signs, you’re likely in talks with a scammer.

Today, it’s easier than ever to do a bit of research on potential illegitimate businesses. Check out the following resources before moving forward with a company you’re suspicious of:

  • Local and national Better Business Bureaus, where you can read customer reviews and find information on licensing and bankruptcy.
  • Other Business Affairs Offices: Your local Chamber of Commerce, Federal Trade Commission, and State and County District Attorney’s offices can provide information on consumer alerts and frauds.
  • Search Engines: Don’t forget the power of Google or Bing to find information on a company. While you need to do research to verify information found through searching, it can be a good starting point.

The Scammer’s Application Process

Legit lenders have detailed application processes and look into specific details of your business and credit history. Be wary if you see any of the following when applying with a company:

Low Interests Rates for Applicants with Low Credit Scores

High credit scores help applicants get low-interest rates because their credit history shows them to be a low-risk borrower. Applicants with lower scores get higher rates because banks are more hesitant about their ability to pay. That’s the way it is.

Companies that offer low rates to customers with low credit scores fall under the “too good to be true” category. In some cases, the company won’t even care about your credit score! While some lenders do specialize in bad credit loans, they won’t offer the same low rates that excellent credit score borrowers enjoy.

Look Out for “Guaranteed Loan Approval” Messages

Unfortunately, this is another “too good to be true” scenario. Lenders approve and deny applicants based on their judgment of your ability to pay. Companies that don’t care about your credit score won’t be giving out the loan in the first place. Instead, they will make you pay an upfront fee that you’ll never see again — leading us to our next point.

Upfront Payments

No legit lender will ever ask for high upfront costs to process your loan. Period. Legit lenders make money from the monthly payments they receive from borrowers. That’s the whole point of an interest rate! The only time you should consider making a payment is when a Small Business Administration (SBA) broker requests one to review the application. These fees are typically low and usually considered as part of your application fee.

Processing Fees

Some scam companies require “processing fees” through Western Union or a prepaid debit card. The reason why scammers prefer these payment methods is that they aren’t traceable, making it harder to get your money back once you can prove you were scammed.

Educate Yourself

While the above warning signs make it easier to spot faulty loan companies, you shouldn’t stop there. As a business owner, it’s your job to educate yourself on common business practices. Consider the following tips as you grow your business:

  • Read Everything Carefully, Then Read It Again: From loan contracts to supplier agreements, you should always re-read documents that require your signature. Not only will this help you catch the “fine print,” but familiarize you with how these documents are put together. If you’re extra cautious, turn to a lawyer or finance expert to walk through the document with you.
  • Learn About Business Practices: Small business owners can always learn more about common business practices and finance. Take a course on finance to learn how interest rates and lending work. Read up on different loan types and when they’re used.
  • Speak With Other SMBs Owners: SMBs owners go through many of the same experiences, from trying to secure funding to keeping a steady cash flow. Join a local business group and share your experiences with other owners. Learn about common pitfalls and business tips from them.

Never Rely on False Hope

It’s a sad reality that scammers take advantage of SMB owners’ hope for their own gain. While growing a business is never easy, knowing how to spot faulty loans will only help you in the long-run. Never underestimate the power of common sense and your gut instinct. If something seems off, it probably is. After all, it’s that mix of savviness and knowledge that makes you a successful SMB owner in the first place.

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Jason Kruger
Jason Kruger has more than 16 years of accounting and finance experience in both public and private industry accounting. Since 2008, Jason has acted as the CFO for many of Signature Analytics’ clients, providing them with the financial analysis they need to grow their business and make more data driven decisions. He has direct experience with many complex accounting and financial issues within a variety of companies and industries, including software, technology, biotech, manufacturing, food/beverage, apparel, construction, and advertising. Prior to Signature Analytics, Jason spent ten years in public accounting, culminating as an Audit Senior Manager with Deloitte in San Diego. He received his bachelor’s degree in Accounting/Finance from the University of Arizona. Follow @SignatureAnalytics on Facebook and @Outsourcedacctg on Twitter.

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