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Watch Out for These 7 Red Flags of a Small Business Loan Scam

By: Lending Tree


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Many small businesses are struggling due to the COVID-19 pandemic and the economic impact of mandatory closures and disruptions to supply chains.

According to one survey of more than 5,800 small business owners published in the Proceedings of the National Academy of Sciences of the United States of America, over 70% of small businesses planned on taking advantage of Paycheck Protection Program (PPP) loans, which were part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

PPP loans offered potentially 100% forgivable, low-interest loans designed to help small businesses continue paying employees and covering other operating costs. But those loans weren’t always easy to get. Many small business owners faced overworked lenders and rejected applications. Those lucky enough to get funds then had to deal with confusion over applying for loan forgiveness.

Rising demand for small business loans and hurdles to accessing legitimate funding programs have created a perfect storm of opportunity for scammers.

7 ways to spot a small business loan scam

You may have already received a letter, call or email offering funding for your small business. But is it legit? Here are seven red flags that may signal a so-called lender is more interested in stealing your money than providing a loan.

  1. You receive an unsolicited loan offer

Cold-calling small business owners to offer loans isn’t a common marketing tactic among legitimate lenders.

If you receive a call, letter, email or text inviting you to apply for a PPP loan or another loan or grant backed by the U.S. Small Business Administration (SBA), it could be a scam. The SBA never initiates contact on its 7(a) or disaster loans or grants.  If someone calls you out of the blue claiming to be from the SBA, don’t give them any information.

  1. The offer is too good to be true

Thousands of dollars, no strings attached? Guaranteed approval without so much as a credit check? If a loan offer seems too good to be true, it probably is.

Many small business loan scams try to hook potential victims by offering generous loan terms that are hard for a struggling business owner to resist. Once you take the bait, they demand an upfront fee or lock you into a different, high-interest loan.

If the advertised loan terms or interest rate are dramatically different from what you see offered elsewhere, it might be a scam.

  1. The lender asks for upfront fees

No matter where you get funding, your options will likely involve some type of small business loan fee. But legitimate lenders disclose these fees clearly and prominently. They’re also typically added to the loan amount, allowing you to spread the cost over the loan term.

If a lender requires payment upfront or asks for your credit card or bank account information before approving your loan application, it could be a scam.

  1. The lender’s name sounds a little off

Are you applying for a loan with Walls Fergo or U.S. Bunk? Some small business loan scammers try to sound legitimate by using names that are oddly close to well-known lenders’ names. They may even have websites that look impressive. But do your research before giving out your Social Security number or other personal information.

Lenders are required to register in the state in which they do business, so call your state’s attorney general’s office or the Department of Banking and Finance to see whether the lender is registered in your state.

If you’re applying for an SBA loan, use the SBA’s online tool to find an authorized lender in your area.

  1. You’re asked to pay with a gift card

There are plenty of legitimate ways to make a payment toward a loan. Lenders might require a cashier’s check for a down payment and accept electronic or paper checks for monthly installments. If the so-called lender asks you to make unusual payment arrangements, that’s a red flag.

Scammers will sometimes ask people to buy popular gift cards for places like Amazon, MoneyPak or Google Play. They’ll ask you to provide the gift card number and PIN over the phone. With that information, they can take the money you’ve loaded onto the card, and you’ll never hear from them again — or have any way to get your money back.

If anyone asks for payment via gift card, it’s a scam.

  1. You’re being rushed through the process

Small business loans are rarely a quick fix for cash flow shortages. In fact, depending on the lender, it might take months to get a small business loan approved. If someone is trying to rush you through the process or promising funding within days, proceed with caution. They could be trying to prevent you from asking questions.

Don’t let anyone push you along the process or put pressure on you to accept loan terms or sign paperwork before you’ve had a chance to review it completely.

  1. You’re asked to send personal information over email

Did you receive an email promising small loan funds and asking you for some basic information to start your application? It could be a phishing attempt. Phishing scams use emails and text messages to trick you into proving your personal information, and the FTC recently warned small business owners about phishing emails claiming to come from the SBA.

Legitimate lenders will not ask you to provide personal information, such as your Social Security number, bank account number or passwords over email. If a lender asks for this information and doesn’t provide a secure way for you to send it, it’s likely a scam.

The more you know about common small business loan scams, the better prepared you’ll be to recognize and avoid them. Ultimately, trust your gut. If something seems off, apply for a small business loan elsewhere.

Published: April 13, 2021

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Lending Tree

LendingTree is an online loan marketplace for various financial borrowing needs including auto loans, small business loans, personal loans, credit cards, and more. We also offer comparison shopping services for autos and educational programs. Together, these services serve as an ally for consumers who are looking to comparison shop among multiple businesses and professionals who will compete for their business.

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