If you need a business loan, there are plenty of legit online lenders that can help. Unfortunately, you’ll also need to watch out for business loan scams.
In this guide, we’ll show you some common business loan scams, what to do if you fall victim and who’s legit in Canada.
If you’re dealing with an unscrupulous company who’s trying to get your money, stop dealing with the lender or scammer immediately. Report the scam to the Financial Transactions and Reports Analysis Centre Canada (FINTRAC), the Canadian Anti-Fraud Centre (CAFC), your bank and the local police.
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Business loan scams work in several different ways, but they exploit one key weakness: your need for fast, easy and cheap financing. In particular, scams often target:
Scamers pretend to be legitimate business lending companies so they can:
And these business loan scams can be a lot more sophisticated than many small business owners expect. Let’s take a look at some common business loan scams to avoid.
With the rise of online lenders, it’s easier than ever before to apply for a business loan. Unfortunately, it’s also easier to fall victim to a scam. Here are some common business loan scams to watch out for.
Scammers create sophisticated websites that look like the sites of legitimate lenders or government-backed business financing programs. They use this to lure you into filling out a loan “application” with sensitive personal and financial information, then steal your money or use your data to apply for loans in your business name.
With the rise of online lenders, these phishing scams are becoming increasingly prevalent. There are plenty of reputable lenders that allow you to quickly and easily fill out an online application to get a loan, and it can be difficult to tell the difference between a legitimate application form and a scam.
With this scam, the scammer promises to approve you for a low-interest loan — but only once you’ve paid an upfront fee. Then once you’ve parted with your money, the loan is never provided.
Whether it’s through text messages, emails, phone calls or social media, beware any lender that makes unsolicited contact with you. Don’t click links you find in emails from unknown senders or in texts from unknown numbers.
Just because you see a business loan offer advertised on a legit website doesn’t mean the loan company is the real deal. Be suspicious of online ads for guaranteed approval or unrealistically good rates.
While there are legit peer-to-peer lending platforms available in Canada, illegitimate providers sometimes use platforms like Facebook Messenger and Reddit to exploit business owners. With this in mind, steer clear of any unsolicited offers for peer-to-peer loans.
There are many legit business loan brokers out there who make money on lender commissions. Unfortunately, there are also some sketchy providers that require you to pay an upfront fee before they will help you find the right loan for your needs. These scammers will usually push the line that business loans are so confusing and complex that you’ll only be able to find the right loan with their expert help.
There are legitimate credit counselling services that can help you take control of debt and rebuild your credit. Unfortunately, you also need to be aware of sketchy credit repair companies that promise to improve your credit score or remove negative listings from your credit report — but only after you pay a hefty upfront fee.
Fraudsters may try to convince you that your business is eligible for a lucrative government grant, but the application process will be far too difficult and time-consuming without their expert help.
If you’re struggling to repay a loan, be wary of fake debt collection scams and dodgy collection practices. These scams often involve the use of threats and harassment to try to get you to cough up your money. Check out our guide to debt collection scams for more information.
There are several red flags that could indicate a business loan scam. If you encounter even one of the signs below, it usually means the so-called lender wants to take your money, not loan you some.
There’s never any reason to pay a lender or 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 origination fees or costs, but these 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 lender wants money upfront, walk away.
You should also be wary of any lender that demands payment via an unusual method, such as cash, a gift card, prepaid card or money transfer app. If you send money using any of these methods it can be extremely difficult to get your funds back.
Avoid lenders who don’t have a physical address or easily-found contact information. Even legitimate lenders that are solely online have clear and easy-to-find contact details and headquarter locations that indicate their legitimacy.
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 that seems to be offering a deal that clearly exceeds other loan offers, you have cause to be suspicious. Read our business loan rates guide to find out what’s reasonable.
No lender can guarantee that you’ll be approved for a loan without first checking the financial health of your business. A responsible lender will assess your business’ financial situation before deciding whether or not to offer you a loan. So without submitting your business application, you shouldn’t trust any guaranteed loan.
If a business lender is emailing you from a Gmail, Hotmail, Yahoo or other generic email account, tread carefully. Lenders should be conducting all business with an official business email address.
If a lender offers you an unsolicited loan, it may be a sign of a scam. Legit lenders don’t offer loans with a cold call. 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 there are legitimate companies that offer these services, they are generally not offered without prompting.
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.
Yes — provided you deal with a legitimate lender.
There are plenty of legitimate online lenders that might ring your alarm bells if you’re used to dealing with banks. There are also fake online lenders that look professional at first glance.
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, actual physical locations (not just P.O. boxes or mailing addresses), memberships to associations and positive customer reviews on independent websites.
You should also recognize 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 Insurance Number (SIN). But you could end up in a cycle of debt if you can’t afford to make payments — something else you definitely want to avoid.
Telling the difference between a legit lender and a scammer is easy once you know what to look for. Remember these tips to help ensure that you find a legit business lending company:
Yes. When you apply for a business loan, some lenders will ask for something known as a personal guarantee. This is when you, as an individual, guarantee that you will pay back what you borrow if your business defaults on the loan.
Lenders ask for this guarantee because it gives them additional protection. If your business goes under, the lender will hold you personally liable for paying off the loan, which gives them a better chance of recovering any losses.
As a borrower, signing a personal guarantee could increase your chances of approval and allow you to access better loan terms. However, be aware that if the business defaults on the loan, the lender can go after your personal assets. It can also impact your personal credit rating, so make sure you’re aware of exactly what a personal guarantee involves before you sign.
If you’ve fallen victim to a business loan scam, there are four main things you need to do:
If you’ve sent money or information to a scammer, contact your bank or financial institution immediately. It 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.
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 some cases they’re overseas where Canadian authorities can’t reach them.
There are multiple ways to report business loan scams in Canada, so consider these contact options:
Contact TransUnion and Equifax and ask them to issue a fraud alert for your credit report. This will help ensure that no new credit accounts are opened in your name.
To ensure that you don’t fall into any more traps or follow-up scams, be aware of these schemes:
You can also place yourself on the National Do Not Call Registry to prevent unsolicited phone calls from telemarketers.
The best way to prevent falling for a scam is to know what to look for when you apply. Do your due diligence to make sure you only ever deal with legitimate lenders. And even if you’ve become a victim, there are still ways you can fight back, even if you can’t recoup your losses.
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