Don’t fall victim to a business loan scam. Know the warning signs and sneaky tactics to watch out for.
Business loans are essential for many businesses, but business lending is also a hotbed for scams. Scammers work from both inside and outside of the US to separate business owners from their money by taking advantage of people who don’t know how the process works or what to expect.
Fortunately, you can stay safe by learning about what to look out for and some of the tricks often used by scammers.
Think you've encountered a scammer?
If you’re dealing with an unscrupulous company who’s trying to get your money, it’s important to stop dealing with the lender or scammer immediately. You should report the scam to the Federal Trade Commission and Better Business Bureau and then file a report with the police.
Nine signs you’re being scammed
There are a few red flags to look out for to tell if you’re being scammed. If you encounter even one of these, it usually means your so-called lender wants to take your money, not give you some.
- Money upfront. There is never any reason to pay a loan broker upfront. It doesn’t matter what reason they give, be it administration fees, credit check costs, processing costs or anything else. A loan broker should only ever get paid by the lender, in commission, after the deal is done. Some lenders might have initiation fees or costs, but these are rarely a significant figure and are only charged once your loan is funded. They should never ask for a down payment or other significant upfront costs before approval. If any loan officer or lender wants money upfront, be cautious.
- Unscrupulous credit repair. A business credit repair service should also be approached with caution. This is particularly true if you are approached by them, they offer the service unprompted or they tell you it’s necessary to repair your credit before getting a business loan. Startups and many other small businesses aren’t expected to have a perfect credit score, and lenders will generally place more weight on your business revenue and other application details rather than your score.
- No contact information. Avoid lenders who don’t have a physical address or easily-found contact information. Even lenders who are solely online like National Business Capital and SmartBiz have clear and easy-to-find contact details and headquarter locations that indicate their legitimacy.
- Really, really good rates and terms. It’s sad to say, but if a deal looks too good to be true, then it probably is. Lenders are competing with each other and are constantly trying to offer better rates and loan conditions to attract more business, but they have limits as to what they can offer without losing money. If there’s one lender who seems to be offering a deal that exceeds other details by a long way, you may have cause to be suspicious.
- They “guarantee” acceptance, or anything else. No lender can guarantee that you will be approved for a loan. When a business offers customers a guarantee, that’s a binding promise they must deliver on. Without submitting your business application, you shouldn’t trust any guaranteed loan.
- Generic email addresses. If a business lender is emailing you from a Gmail, Hotmail, Yahoo or other generic email account, then something is off and you should tread carefully. Lenders should be conducting all business with an official business email address.
- Unsolicited services and contact. If a “lender” offers you a loan unsolicited, it may be a sign of a scam. Lenders don’t offer loans with a cold call. They might send promotional letters in the mail or display ads on your browser, but even those are based on some background information on you. Similarly, you should also be aware of services you don’t want and didn’t ask for, like business plan writing or credit repair. Although these are legitimate services in their own right, they are generally not offered without prompting and you should consider whether you actually need them.
- The wrong type of loan. If you have a pretty good idea of what type of business loan you need but the lender wants to push you towards another option, you may want to be cautious. You might be being steered towards a product with higher rates or worse terms.
- A hard sell. Does your lender seem a bit too eager? Are they contacting you frequently, trying to rush you into a decision, offering free gifts or throwing around phrases like “limited time only” or “last chance”? Legitimate lenders make their money from offering sensible options that you can repay as planned. Scammers make their money by rushing people into bad decisions with big promises, and then running away with the money.
There are a range of different types of business loans such as a merchant cash advance, equipment finance, startup loans and more. The wrong type of loan is one that’s just not right for your needs. For example, if you have the assets and the credit history for a secured loan but the lender says you should get an unsecured loan, or if you need to finance a startup for an extended period of time but the lender wants you to take out a short-term business loan, then they may be trying to stick you with a highly expensive financing option.
Not sure which type of financing is best for your business? Select the borrowing guide for your stage of business growth for personalized recommendations.
Are online business loans safe?
The short answer is: It depends. There are plenty of legitimate online lenders that might ring your alarm bells if you’re used to dealing with banks. But there are also fake online lenders that look professional at first glance. Hold online lenders to the same standard as you would any other provider.
It’s important to remember that there’s a difference between a scam and a bad deal. Not all lenders with low credit requirements, for example, are going to run off with your money or Social Security Number. But you could end up in a cycle of debt if you can’t afford to make payments — something you might also want to avoid.
Three online business loan scams to watch out for
Crooks are getting increasingly tech-savvy when it comes to taking advantage of the unwary. This lets them strike at US business owners from outside the country and steal not only money but also valuable personal information. They may approach you by:
- Taking out ads on legitimate websites. Just because someone is advertising doesn’t mean they’re the real deal. Be suspicious of online ads for guaranteed approval or unrealistically good rates.
- Creating fake websites. Sometimes scammers will create their own imitation business website and then use this to “prove” that they’re real. They might send out links to it in emails and elsewhere. It’s important to remember that having a professional looking website doesn’t necessarily mean a company is legitimate. Check for things like verified contact information and state licenses to confirm legitimacy.
- Cold calls. Whether it’s through text messages, emails, phone calls or social media, beware of someone who keeps dangling a website address in front of you like a fishhook. Don’t click links you find in emails from unknown senders or in texts from unknown numbers.
Once they have your attention, they’ll typically use a few tricks to keep it and create the illusion of legitimacy:
- They will sometimes offer an a state license number that’s real, but belongs to a different actual business.
- They might direct you to a basic website with a landing page for their fake business.
- They may ask for your contact details or personal information to “run a credit check” or “verify your identify” when they in fact plan to sell it to the highest bidder or use it for identify theft purposes.
- They may pose as an international group or government agency with an official-sounding fake name like The International Securities Tax Commission.
How to spot a legit business lender
Separating the two is easy once you know how. Scammers can fake legitimacy in a few different ways, but there will always be signs to look out for. The trick is to make sure that everything adds up. You should know:
- The name of the company representative you’re speaking with and the name of the company itself
- The company’s state license number
- The company’s public phone number
- The company’s physical address
Look for anything that doesn’t match.
- Check the license and make sure it matches the name of the company, the physical address and the phone number.
- Call back the phone number to make sure it’s real and that you can reach the company with it.
- Match the physical address with the license number and phone number if possible.
- Search the company’s name online and look for any scam warnings, feedback or red flags from other business owners.
What to do if you’ve been scammed
If you are the victim of a scam, there are three main things you need to do:
1. Recover your losses
Sadly, most scam victims won’t see their money again. This is because it’s usually very difficult to track the scammers down and in many cases they’re overseas where American authorities can’t reach them.
If you have sent money or information to a scammer, contact your bank immediately. Your bank can cancel any future transactions that may be in the works and close your account if you’ve sent the scammer any information that may have compromised it.
2. Report it
If you’ve encountered a scam lender, or any other fake financial services providers, you should report them to the Federal Trade Commission and Better Business Bureau.
- Federal Trade Commission. Visit https://www.ftc.gov/complaint to submit the details of the scam. The FTC will investigate the “business” of concern and work to put an end to their harmful practices.
- Better Business Bureau. Visit https://www.bbb.org/scamtracker/us/reportscam and provide details of the scam that took place. The BBB will make the company name public so that others can be warned to stay away.
3. Avoid follow-up scams
Scammers will often strike the same place twice or possibly more. To ensure that you don’t fall into any more traps or follow-up scams, be aware of these following schemes:
- Offering more money or more returns to help you recoup your losses
- Telling you to take out another loan so you can meet the repayments of the first
- Claiming they can recover your losses for a fee
- Asking you to pay for travel, accommodation or other costs so that they can “find the scammer” or “get your money back”
Because it’s rare for people who’ve been scammed to see their money again, you’re better off being proactive about protection by following this guide and only dealing with reputable, verified and well-known lenders, the big banks or other established institutions.
The FTC has a scam alerts feed that can alert you of new scams and keep you updated on warning signs to watch out for. You can also place yourself on the National Do Not Call Registry to prevent unsolicited phone calls from telemarketers.