Are you constantly solicited by loan lenders who constantly promise you the best rate along with service? Small business lending can be a lucrative business, so loan officers are constantly looking for sales. As a small business owner, you’ll likely have financing needs to grow your business. Thus, you should know warning signs of an unscrupulous lender. Luckily, most loan professionals are competent and honest, but you should be able to weed out the scammers. Some common warning signs include asking for an upfront fee, no physical location, cash advance lenders, credit repair, “guaranteed loans” along with bait and switch cons.
- Upfront Fees
No Loan Professional be it a lender should ever ask for an upfront fee. Regardless of the “great deal” they’re pitching you, this is a major red flag.
Some loan professionals include upfront fees in the disguise of a down payment, registration fee, or credit check fee. Despite what it’s called, these are upfront fees and should be avoided at all costs.
Ethical loan lenders work for free at first and only take a percentage of the commission from the lender after the loan has closed. In fact, some scammers have taken the upfront payment and left the client holding the bag. This strategy is quite common with online lenders that are located outside of the USA.
- No Physical Address
You should always ask for a loan professional’s physical address which should be a legitimate mailing address, instead of a P.O box. Online lenders that cater to small businesses have greatly increased, but all have a physical location. If the supposed “loan professional” can’t give you a legitimate address that you can confirm, it’s likely a scam from outside the USA.
- Cash Advance Lenders
Business owners rushing to obtain business financing are easy targets for con artists lenders that offer suspect initial funding loans. When you hear “cash advance lender,” you should keep your guard up because most of these lenders sell loans with unreasonable rates and terms.
Although it might seem tempting to obtain financing at a fast rate, this is “penny smart, but pound stupid.” This means that business owners might think they will save in the short term, but it will cost them more in the long term. Having the right loan consultant can make a business thrive, while having a scammer like cash advance lenders can stop it before it started. Thus, it’s crucial to conduct a thorough background check on the lender and completely understand your loan’s terms. Remember that loan professionals are salesmen and be wary if they’re trying to hard sell you into impulse decision making.
- Credit Repair
Most businesses don’t have perfect business credit, especially brand new startups. However, many predatory loan con artists would like you to believe that they can repair your credit. These services will offer to “repair” your credit to make you more likely to be approved for a loan, but they want to pad their own pockets.
This scam should not be mistaken for personal credit repair, which can be beneficial, depending on your circumstances. If you have a credit score higher than 650, you would likely have a large variety of options for business loans. But, if your personal score is 500 or below, you might need to consider credit repair assistance. Be sure to work with a legitimate provider as many fraudsters like to especially prey on those with low credit.
- “Guaranteed” Loans
Nothing in life is guaranteed including loan approvals. Any respectable lender will never guarantee your approval for a loan before they received your application. If a “loan professional” guarantees that you will be approved before reviewing your cash flow and background, this is a huge warning sign. You should also know that many of these scammers lure unsuspecting borrowers with great terms, even if they have low or no credit.
Luckily, business owners have plenty of lenders to choose of due to the growth of the online lending sector. Regardless of the lender sector, always do your homework and trust your instincts. If you feel that something is not right, you can contact your state’s Better Business Bureau for more information.
- Bait and Switch
As the name suggests, unscrupulous loan professionals sucker unsuspecting borrowers with excellent terms. Many borrowers aren’t familiar with the terms, rates and conditions of a variety of loans. Thus, these con artists use this to their advantage and tell borrowers they’re getting “a steal.” Then, the scammers can change the terms of the loan to have predatory terms along with usurious rates. Thus, it’s critical to thoroughly review your loan contract to clarify any misunderstandings. In addition, you should never work with a company that attempts to modify your contract after you’ve signed it.
Another way companies manipulate borrowers is to quote the rate in simple interest, not APR. Most companies use APR, which is the true cost of the loan. You can use this free APR calculator, which will show you the true rate. Also, consider consulting an independent financial planner to explain the terms to ensure you’re getting accurate and straight forward information.
So, what is the difference between APR and simple interest? Let’s look at this sample problem below:
If you want to buy a $30,000 bulldozer, and are quoted $800 as the monthly payment for 5 years, to compute simple interest:
Assuming you pay the first and last payment up front, $29,840 is the loan amount for 58 months. To borrow $29,840, you will pay ($800 X 58) = $46,400. The total finance charges are $46,400 – $29,840 = $16,560, for $285 a month in interest or $3,426 per year which is approximately 11% simple interest.
If you input these numbers into a loan amortizing calculator, you will find that the APR is really 26% instead of 11%
Every business goes through cycles of growth, which can require tailored financing. With the right loan, a business can truly thrive and grow. Thus, it’s important to use the right lender to ensure your success. Most loan professionals are ethical and savvy professionals, but others are only out for themselves. Warning signs like asking for an upfront fee, no physical location, being a cash advance lender, credit repair, bait and switch along with so called “guaranteed loans” can expose a fraudster. What other warning signs do unethical loan professionals have? Please tell us below!