Avoid These Types of Business Loan Scams

When searching for funding for your business, you can face small business loan scams. We introduce you to effective tips to avoid this unpleasant situation.

In the bustling marketplace of modern commerce, small business owners face threats more daunting than just the competition: phantom government agents who threaten to padlock your dreams unless you cough up 'overdue taxes' immediately. Or those tantalizing emails promising a hefty business loan – if only you'd kindly deposit a 'small' fee to secure it. 

Small businesses are bombarded with creative cons that could make even the savviest entrepreneur's head spin. Before you offer your bank details or sign on the digital dotted line, let's delve into nine common small business loan scams and offer insights on how to decrease risk and safeguard your business.

9 Types of Business Loan Scams

Small business loan scams can be particularly harmful because they often target small business owners who need funding the most. According to LexisNexis, in 2022, the rate of small business loan scamming went up by 7.6% from the year before. 

To protect yourself from becoming part of the statistics, here are some common types of business loan scams to be aware of:

Advance Fee Fraud

Advance fee fraud involves scammers who convince their victims that they've been approved for a loan. This is sometimes called a “guaranteed loan scam”, as some lenders will reach out with promises of a guaranteed loan without credit review. 

In either case, the scammer will tell the borrower they must pay an upfront fee before any funds can be disbursed. Eager for the funds, many fall into the trap, pay the fee and find that the scammer disappears, leaving them without the loan they anticipated and out of pocket for the fee.

Phishing Scams

Phishing is quite common: four out of five businesses experience a phishing attempt every year. Phishing scammers impersonate legitimate lenders, sending out seemingly authentic emails or messages asking for sensitive personal and financial information. 

Unsuspecting business owners may hand over personal data like bank accounts and routing numbers, thinking they are communicating with a legitimate entity, only for the scammer to misuse this information for identity theft or unauthorized transactions.

SBA Loan Scams

SBA grant scams are especially prevalent during economic downturns, as scammers exploit the allure of SBA loans. Loans offered through the SBA often come with lower interest rates and guarantees, which make strong leveraging tools for a scammer. 

Scammers may claim to offer special access or expedited approvals for these government-backed loans, asking for fees. Remember that genuine SBA loans don't require fees or guarantees of approval.

Peer Lending Scams

Peer lending platforms connect borrowers directly to independent lenders, often average people looking to offer lending opportunities to community members in need of loans. Because of the more casual nature of this loan, there is room for business funding scams, as scammers exploit this system by creating fake platforms. 

Borrowers are lured with attractive loan offers, but once they engage, they're asked for upfront fees or personal information. The scammer then disappears, often with the fees, without ever providing the loan and potentially misusing any shared personal information.

Loan Broker Scams

Many legitimate loan brokers help businesses find the right loan. However, fake brokers exploit this trust. They promise businesses they have special relationships with lenders and can secure great rates – but only after an upfront fee is paid. Once paid, these fraudulent brokers disappear, leaving the business out of pocket and without a loan.

Duplicate Charges

While obtaining a loan, businesses expect to be charged agreed-upon fees and interest. But in this scam, a dishonest lender might duplicate charges, sneak in hidden fees, or process a single charge multiple times. 

By the time businesses notice the discrepancies, they've paid significantly more than they should have. Many lenders do this after providing a loan by creating exorbitant repayment fees. 

Ghost Investors

For businesses seeking an equity injection rather than debt, ghost investor fraud is a concern. These fraudsters pose as wealthy investors or venture capitalists. They show a keen interest in a business and then request an upfront fee, perhaps for their promise of investment. Once the fee is transferred, the investor disappears, never intending to invest.

Blank Document Scam

In this scam, a lender will present a business with blank or partially filled loan documents for signature, usually with the assurance that the details will be filled in later. Once signed, the dishonest lender fills in unfavorable terms, committing the business to high rates, fees, or undesirable conditions.

Fake Loan Applications

Identity theft isn't limited to individuals. Scammers can target businesses, using stolen credentials to apply for large loans. If approved, they pocket the funds. The legitimate business, unaware of the application, is suddenly burdened with a debt they never took on, leading to credit damage and financial complications. 

Warning Signs of Scams

Becoming familiar with the warning signs of small business loan fraud can be your first line of defense against scammers. While some scams might appear incredibly sophisticated, many share common red flags.

Recognize these signals to avoid falling victim to scamming tactics: 

• Upfront Fees: Beware of lenders asking for fees upfront before you even apply for a loan. While some legitimate business loans might have associated costs, they are generally deducted from the loan amount or paid at closing, not before approval.
• Guaranteed Approval: No reputable lender can guarantee approval without first reviewing the business’s credit history, financials, and documents. If a lender promises guaranteed approval, be skeptical.
• Unsolicited Offers: Be cautious if you receive unsolicited loan offers via email, phone, or mail. Legitimate financial institutions usually don’t operate this way.
• Pressure Tactics: Scammers often use high-pressure sales tactics, urging you to decide quickly. They might say the offer is time-limited or that you'll miss out if you don’t act now.
• Extremely Low-Interest Rates: If an offer seems too good to be true – like an extremely low-interest rate – it probably is.
• Vague or No Physical Address: A legitimate financial institution will have a physical address. If a lender only lists a P.O. Box or has no address at all, it's a red flag.
• No Registration: All lenders and loan brokers must be registered in the states where they conduct business. Check with your state's Attorney General’s office or the Department of Banking or Financial Regulation for proper licenses.
• Unprofessional Appearance and Language: If the lender's website or documentation has glaring typos, poor grammar, or looks hastily put together, be wary.
• Absence of a Secure Website: When dealing with financial transactions, ensure the lender’s website starts with "https" (the "s" stands for secure) and has a padlock symbol in the address bar.
• Requests for Unusual Information: Scammers may ask for personal information that legitimate lenders wouldn't, such as your Social Security number or personal bank account login details.
• Copycat or Fake Names: Some scammers will use names similar to reputable companies to confuse borrowers. Always verify the lender’s legitimacy by checking their business address to make sure they match the given name, making sure all emails and brand identifiers match the real brand, or checking websites for legitimacy.
• Unsatisfactory BBB Ratings: Check with the Better Business Bureau. If the lender isn’t listed or has a poor rating, it might be a scam.
• Unclear Terms: Legitimate lenders provide clear, transparent terms and conditions. If a lender is not upfront about the terms, or if the agreement is vague or incomplete, it’s likely a scam.
• Inconsistent Communication: If a lender's representative avoids answering your questions directly, changes contact information frequently or provides inconsistent answers, these are potential red flags.

8 Steps to Avoid Business Loan Scams

Now that you know some common indicators of a scam, let’s talk about how you can protect your business against loan scams.

1. Use Trusted Platforms: Only apply for loans through reputable platforms or financial institutions that you trust. Leveraging platforms with robust reputations can significantly reduce the risk of encountering scams. Researching a company, finding verified reviews and prior borrowers, checking a physical location, and looking for anything suspicious on a company website can all help prove a trustworthy lender.
2. Perform Comprehensive Research: If you’re considering using a less widely known lender, look for customer reviews, check their BBB rating, and verify their registration with your state's regulatory bodies. This will help confirm the lender’s legitimacy.
3. Secure Your Information: Never share sensitive information like Social Security numbers or bank login details over the phone or email, and only enter such information on secure websites (look for “https” and a padlock icon in the address bar).
4. Seek Professional Advice: Consult with a financial advisor or legal counsel before finalizing any loan agreement. Professionals can offer insights into whether a loan offer is legitimate and whether it is the right fit for your business needs.
5. Maintain Regular Credit Checks: Regularly monitor your credit reports for any unusual activities or inquiries. If you spot any unauthorized or suspicious activity, report it immediately to the Federal Trade Commission (FTC) or your local police. 
6. Compare Offers: Unusually favorable terms can be indicative of a scam. To protect yourself, compare loans from at least three providers before committing to one lender. You can submit a pre-qualification request to see what loan amounts, terms, and interest rates you might be eligible for. If the loan offer you received does not match your pre-qualification, it might be indicative of a scam.

What to Do if You’ve Already Been Scammed

If you believe you've been scammed, act quickly to safeguard your personal and financial well-being.

• Immediately cease all communication with the suspected scammer.
• Next, ensure you document all interactions, saving emails, texts, or transaction details. These can be helpful for authorities to identify and manage fraud. 
• Contact your bank or financial institution to halt unauthorized transactions and potentially reverse any payments.
• Lastly, report the incident to your local law enforcement agency and any relevant consumer protection bodies in your jurisdiction. It’s recommended to do this in person by visiting your local police station to share any sensitive information, such as bank statements or evidence of the scam, in a secure way.
• After filing the report, ask for a copy of the report for your records in case your bank or insurance agencies need the record. 
• Keep updated on any developments to ensure no further information is needed. 

Your prompt action not only aids in potentially recovering lost funds but also helps in preventing others from falling victim to the same scam. 

How to Report a Business Loan Scam

When you suspect you've encountered a small business loan scam, taking swift and precise action can protect yourself and others. First, cease all communication with the suspicious party.

Next, reporting a business loan fraud is pretty straightforward: in the U.S., the Federal Trade Commission (FTC) is a primary resource for this. Their website offers an easy-to-use portal to report fraudulent activities. 

If you share any personal details with the suspected scammer, alert your bank or financial institution to prevent any unauthorized transactions. You should receive a reference number for a submitted fraud report if you wish to track and follow up on the progress of the investigation. 

Conclusion

The ever-evolving landscape of scams, particularly in the realm of business loans, underscores the importance of vigilance and education. As fraudsters employ increasingly sophisticated tactics, as a successful small business owner, you must remain proactive, informed, and cautious in your financial dealings. Remember, prevention is always better than cure, and being informed is the strongest defense against falling victim to scams.