When running a business, it is not unusual to encounter the need to borrow. Perhaps you want to add inventory, purchase equipment, expand your store, or pay your workers. The list of reasons to take a business loan is literally endless. However, it is worth noting that businesses like yours lose billions of dollars each year from loan scams and fraud. So, how can you protect yourself from business loan scams and avoid becoming the next statistic?
This article explains what business loan scams are and the commonly encountered types, alongside ways to spot them from afar.
What Is a Business Loan Scam?
Simply put, a business loan scam is a fraudulent lending deal perpetrated by con artists who target business owners looking to borrow money. Apart from “stealing” money from victims, they also illegally obtain business and personal information in the process.
Oftentimes, these scam artists will pose as respected lending brands, bankers, or loan brokers. Some of them will conceal the fees, only to hit you with penalties and unexpected charges later at some point.
This is one of the reasons why using the iSelect Business loans calculator is advisable when applying for a business loan. The tool lets you compare loan rates from dozens of lenders so you can find a loan that suits your specific business needs without being scammed.
Common Types of Loan Scams
Business loan scams come in all shapes and sizes. Some of them are designed to snag money from victims up front, whereas others hit borrowers with undisclosed charges and fees. Some of the most common types of business loan scams include the following:
- Hidden Fees Scam: These pose as low-cost loans, but the scammers will actually ask for money up front.
- No-Credit Check Scam: These loans commonly target lenders with low or bad credit scores. They promise to approve your loan without checking your credit.
- Debt Consolidation Scam: If you are drowning or struggling with debt, you could fall victim to this type of scam if you are not careful. A debt consolidation loan is an effective way of getting out of debt, but some lenders or scam artists take advantage of this.
Common Red Flags of Business Loan Scams
It might not always be obvious, but there are a few ways to spot a potential loan scam. Some warning signs to look out for include the following:
- The Lender Asks for Funds Up Front: When you approach a lender, and they ask for a prepaid debit card or funds up front as collateral, you could be falling into a scammer’s trap. Legitimate lenders will often charge a loan application fee alongside other costs, but these are usually deducted from your loan. Moreover, prepaid cards carry untraceable cash, meaning you will have no proof that your money was stolen if the loan turns out to be a scam.
- The Lender Approached You: Every now and then, you might get a loan offer through a phone call, email, or SMS. Some banks also have door-to-door sales representatives nowadays. However, it could be a scam if there is no way to prove that the marketer is from a legitimate financial institution. If the said lender is using aggressive sales tactics or pressuring you to grab the offer immediately, it is best to steer clear of such a deal. When taking a business loan, making a rash decision can be a terrible blunder. It requires patience.
- There is No Transparency About the Costs: Lenders that do not fully disclose the fees and charges are probably up to no good. More often than not, such lenders turn out to be scammers. This is all the more reason to conduct research and use a loan calculation tool to compare rates from different lenders as previously mentioned.
- Unregistered Lender: Business financing is a delicate area, where a lot of caution is needed when choosing a lender. If a lender is not registered and reputable, it is best to avoid any dealings with the lender. This is especially if the lender is offering you a deal that sounds too good to be true. If the lender has no contact information on his/her website, you could be looking at an outright scammer posing as a reliable lender!
Fraud is not a new thing in the business world. These days, many businesses fall victim to loan scams when seeking business financing. Hopefully, the pointers above have shed some light on this and informed you on how to avoid business loan scams.
