Don’t Fall for Small Business Loan Scams – Here’s How to Stay Safe

The internet has created an unprecedented number of connections between lenders and small businesses. While this effortless connectivity makes it easier for business owners to connect with legitimate lenders, it has also opened new avenues for scammers to exploit.

Under the guise of offering financing for business and guidance, these fraudsters ask for money, personal information, and even bank account details, using them for phishing and financial theft. The rise of small business loan scams has made some business owners hesitant or even outright resistant to using the internet to secure funding.

However, avoiding online lending due to fear of business loan fraud is like throwing the baby out with the bathwater. Today’s online lending marketplace is filled with opportunities for borrowers to access the funding they need to grow their businesses.

In this article, we will discuss how small business owners can avoid small business loan scams, the red flags to watch for, and the steps to take if they fall victim to a scam.

Types of Online Small Business Loan Scams

There are a wide variety of online business loans available, providing fraudsters with plenty of opportunities to hide. Here are some of the most common online scams and fraud alerts small business owners may encounter, along with the red flags that can help identify them.

Credit Repair Scams

Not everyone has a perfect business credit score. If your business credit score isn’t where you’d like it to be, it can significantly hinder your company’s success. Many entrepreneurs work tirelessly to improve poor credit and scammers know this. They often target business and startup owners with an offer that seems too good to be true: for just a small upfront fee. They claim they can work with credit agencies to clean up your credit history and boost your score by hundreds of points to improve business loan criteria.

If it sounds too good to be true, it probably is and, in this case, it definitely is. You’ll send them the fee, but your credit score will remain unchanged. The only financial change you’ll see is the money disappearing from your account.

Red Flag to Avoid: Offering the impossible

If an entity or individual reaches out claiming they can magically boost your credit score, erase a missed payment, or alter the undeniable facts in your credit history, consider it a red flag. This is likely a suspected fraud designed to exploit desperate business owners.

Advance Fee Scams

The advance fee scam is another common small business loan scam where a scammer claims that they can help you secure a business loan, just for a small upfront fee. Despite your poor credit and the fact that you’ve never heard of this lender before, they offer an unbelievably low interest rate, plenty of working capital, and a generous repayment term. Once you send the money, the scammer vanishes, and the promised loan amount never materializes.

These small business loan scams are among the most prevalent in online lending. They prey on borrowers searching for the perfect loan, exploiting the fact that legitimate lenders do charge fees for small business loans. To appear credible, scammers disguise themselves as legitimate lenders with seemingly standard fees. As a result, it’s easy to fall for what appears to be the ideal loan offer, only to realize too late that the loan never existed.

Red Flag to Avoid: Not much information online

Legitimate lenders will have plenty of information available online. Companies engaging in business loan scams are notorious for hiding their identities and locations for obvious reasons. You may only find a poorly written Craigslist post about the lender, or they might have a professional-looking website filled with glowing testimonials but no presence on reputable financial websites.

Ghost Investors

Imagine opening your email to find a message from an officer representing a reclusive billionaire, eager to invest hundreds of thousands of dollars in your company. Sounds like excellent news, right? All they need is your credit card details, bank account information, and Social Security number to verify your ownership. However, once you send over this personally identifiable information, you soon discover fraudulent loan applications, unauthorized charges, and other clear signs of identity theft.

Red Flag to Avoid: Unsolicited contact

Convincing an investor to purchase equity in your company is a challenging process, far more difficult than simply receiving an unexpected email. If you’ve received an unsolicited request for sensitive information, proceed with extreme caution. This is likely a small business loan scam or another form of deception.

Consultant Scams

Finding the right business loan can be challenging. There’s a lot of financial information to analyze, a complex credit report to review, and valuable time that could be better spent running your business. Crooked loan brokers may call you on your phone number, offering to simplify the process and secure the best loan terms for a fee. However, they often demand upfront payment and disappear without delivering any real assistance.

Red Flag to Avoid: Asking for money up front

Reputable lenders will often work with loan brokers; however, the real loan brokers take commissions. If an unsolicited consultant or loan broker is offering services for an upfront payment, tread lightly.

Funding Kit Scams

A close relative of the consultant scam is the funding kit scam. Be cautious of these "free money" scams that promise government grants or funding, especially those found on Facebook or other social media platforms. These small business loan scams often require upfront fees or personal information, which are clear red flags for fraud.

They specifically target businesses seeking disaster loans, such as the Economic Injury Disaster Loan (EIDL), particularly after pandemic and crises like hurricanes, wildfires, or economic downturns. Scammers exploit the urgency of businesses needing financial relief, claiming their kits will guarantee EIDL approval or fast-track the process. Unfortunately, these kits rarely provide any real value and often come with hidden fees and additional costs, leaving business owners out of pocket without meaningful assistance. Always verify EIDL applications through the official SBA programs website to avoid falling for such small business loan scams.

Red Flag to Avoid: No physical address

Legitimate lenders will always have a physical office location, not just a PO box or vague contact details. If an online lender only provides a PO box (or no address at all), it's a major red flag indicating potential fraud. If you have doubts about a lender’s legitimacy, check with the Better Business Bureau (BBB) to verify their credentials and avoid falling for a small business loan scam.

What to Do If Your Business Falls Victim to a Scam

Scammers can be incredibly sophisticated, and mistakes happen. You thought you were undergoing a routine credit check, but now you’re a victim of identity theft. You believed you were paying a processing fee to a financial institution, but now you’re out $10,000, and the supposed lender has disappeared. It happens. Fortunately, there are several ways to take action and help prevent future scams.

Contact The Police, The Consumer Financial Protection Bureau (CFPB)

These scammers have committed a crime, and you shouldn’t hesitate to report their actions to the police. While you may not be their last target, your report can help law enforcement and possibly the Inspector General to ensure they don’t succeed again. Additionally, contacting business oversight agencies, such as the Consumer Financial Protection Bureau (CFPB), can help raise public awareness about the small business loan scam and expose the fraudster’s false front.

Contact The Federal Trade Commission (FTC) If Your Identity Was Stolen

The Federal Trade Commission (FTC) will help you take the appropriate steps to reclaim your identity and repair the damage the scammers may have done.

Conclusion

These days small business loan scams are surely a growing threat. However, if you stay informed and vigilant, you can protect yourself from falling victim to these small business loan scams. To tackle such frauds, it is important to research lenders thoroughly, watch for red flags like upfront fees and unsolicited offers. Additionally, verify the legitimacy of such lenders through trusted sources like the Better Business Bureau (BBB) and the Consumer Financial Protection Bureau (CFPB).

However, if something feels wrong to you, always trust your instincts. Legitimate lenders will never pressure you into making hasty financial decisions. Moreover, if you’ve already been scammed, take immediate actions by reporting business loan fraud to authorities, freezing compromised accounts, and safeguarding your business’s financial future.

You should always stay one step ahead by educating yourself, verifying lenders, and securing the necessary funding with confidence. In case you need guidance on finding legitimate small business loan options, don’t hesitate to reach out to a trusted financial advisor or explore reputable lenders today.

Frequently Asked Questions About Small Business Loan Scams

How can I identify a small business loan scam?

To identify a small business loan scam, you should always look for red flags like any upfront fees, vague company details, and unsolicited loan offers. Scammers often put pressure on business owners to act quickly and avoid answering detailed questions. To avoid this situation, you can always research about the lender through verified sources like the BBB and CFPB.

Are legitimate lenders allowed to charge upfront fees?

Yes, legitimate lenders might charge application or origination fees, but these are usually deducted from the loan amount. While the scammers demand payment before the approval and often disappear afterward. Hence, it is important to verify lender policies before making any sort of payment.

What should I do if I’ve already fallen for a small business loan scam?

If you’re in a situation where you’ve already fallen for a small business loan scam, immediately report the fraud to the CFPB, FTC, and local law enforcement. Also, contact your bank to freeze any compromised accounts and prevent further unauthorized transactions. You can also monitor your credit report for any kind of suspicious activity.

Can scammers steal my identity through fake loan offers?

Yes, scammers often request Social Security numbers, bank details, and business credentials through fake loan offers. Once obtained, they use this data for fraudulent loans, credit applications, or unauthorized transactions. Keep in mind to never share any sensitive information without verifying the lender’s legitimacy.

How can I safely find a business loan online?

You can safely find a business loan online through reputable financial institutions, online marketplaces, or government-backed lenders like U.S. small business administration. Always check lender reviews, verify their registration with financial authorities, and avoid those with limited online presence. Additionally, read the loan terms carefully before signing.

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