How to Avoid Small Business Loan Scams
March 11, 2019 | Last Updated on: July 18, 2022
March 11, 2019 | Last Updated on: July 18, 2022
Whether you’re starting up, building and expanding, or just shoring up cash flow, business loans are an essential aspect for the success and growth of almost any small business. As a result, online loans can be a great resource for small businesses. Most of the time they’re quick, convenient and can provide working capital fast. However, in today’s day and age, many business owners are worried about the rise of scammers, including various 2018 survey conducted by the Better Business Bureau, 67% of business owners said that the risk of scams is higher than it was three years ago. 10% of business owners also said that they would likely lose money to a scammer.
In this post, we’ll detail what to look for when shopping for a business loan online, and what signals you should look for to ensure that you are not being scammed or being taken advantage of by a disreputable company.
It can be overwhelming to try and figure out if you’re vulnerable when shopping online. Thankfully, there are plenty of security signals that business owners can look for to feel more confident they’re making a smart decision. Security signals generally fall into two categories. These categories are technical security and operational security. Understanding what to look for within these categories can help you weed out the good from the bad and ensure that you are entering into a deal with a trustworthy lender.
SSL, which is the abbreviation for Secure Sockets Layer, means that your internet connection with a website is secure. When a website uses SSL it means the data being transferred back and forth between your computer and the website is being encrypted so that the information cannot be intercepted by criminals. All legitimate lenders will have this certification on their online website so that your personal and business information is always protected.
It is important to note that there are different levels of validation, which you should bear in mind. Any site that starts with “https” instead of “http” is considered validated. But this only guarantees they have Domain Validation (DV), which is the lowest validation, and doesn’t guarantee very much in the way of security other than that the data being transferred is encrypted.
The highest validation, and the one which you should be looking for, is the Extended Validation (EV). For businesses to acquire this verification, they have to go through a comprehensive process that makes it much harder for phishing and other fraudulent websites to receive verification. While it is possible that fraudulent sites could acquire the verification, EV-verification is a relatively good indicator that you are viewing a legitimate site.
To verify that the website is certified with Extended Validation SSL, simply look at the URL bar. It is slightly different for each web browser, but they all will feature a lock and the color green somewhere. The color green should either light up the entire bar (as in Internet Explorer), or the lock and the name of the website should be the color green (as in Google Chrome and Mozilla Firefox).
Your social security number (SSN) is one of the most important aspects of your identity. As such, reputable lenders realize how important it is and take necessary care to respect your privacy. If you are asked to send your social security over email, instead of entering it into a secure online form, you should know right away that you are not dealing with a legitimate lender.
Lenders should be constantly seeking to ensure the personal information of their borrowers is safe. You should be worried whenever a lender doesn’t seem to be taking adequate precautions to help you set a safe password. They should be requiring you to meet certain password requirements 0for accounts with them. These requirements should include things like a mix of capital and lowercase letters, a minimum length, numbers, and possibly a special character.
Reputable companies will always have some form of privacy statement on their website. This should detail what measures they take to protect your privacy, who else they may consider themselves able to give your information to, and what they believe they are liable for. Before entering any agreement or transferring any information to a lender, you should read through their privacy statement to make sure you are comfortable with their terms and ensure that they guarantee they will not sell any of your information. If you are working with a lending broker instead of a direct lender, your details could end up being turned over to dozens of other companies without your prior knowledge.
This is one of the most important, and easiest to spot warnings, and it is something that rings true for more than just loans. While there are good deals out there to be found, you should use your common-sense judgement to recognize whether or not a deal seems realistic.
Before signing any agreements, always consider the terms from the standpoint of a lender. After all, the lender is there for a reason: to make money off of loaning money to you. If you were a lender making this offer, would you be comfortable with the deal? Is there a large risk and will you be making money? This is important because lenders are not there to give you a hand-out. If they’re offering a deal that is 0% interest, with no fees other than, for example, a one-time upfront cost, then it’s not a legitimate loan.
According to the 2018 Better Business Bureau survey, of the businesses that were harmed by scammers, 17% said that one of the methods they used was “they enticed us with promises of amazing deals”. Don’t take the bait. If it sounds too good to be true, treat it like it is too good to be true.
This is another easy to spot red flag. No lender should be able to guarantee your approval, and if they are saying they will, then it is not a reputable lender. This goes back to the idea of looking at it from a lender’s standpoint. They have to make loans that are not a huge financial risk to them and in order to do this they have to deny businesses that don’t meet their lending and risk criteria. If they guarantee you that you will be approved without asking you for any further details about your business, then they are not legitimate and you should look elsewhere.
A huge red flag signaling a disreputable company is if they don’t have easily accessible contact information. Reputable lenders will be easy to contact them whenever you want, with their company’s phone number, email, and address prominently displayed.
While they may not have a lot of physical locations like a bank, since many online lenders only have online presences, they should have an address posted indicating the existence of a headquarters for their business.
This is a huge indication of a scam. Scammers like to offer fantastic terms in “limited time” and “final chance” offers. They also are unrelenting, and will continue to contact you night and day, always sweetening the deal, to try to rush you into a deal before you have time to realize what they’re doing.
Qualified, reputable lenders will not do this, and offer realistic options that you can repay and that they can accept from a risk standpoint.
In fact, according to the previously mentioned 2018 Better Business Bureau survey, of the businesses that were harmed by scammers, 49% said that scammer “created a sense of urgency” to trick them.
Scammers will often provide you with long, confusing contracts that are hard to understand and meant to overwhelm you. If you’re working with an individual who’s helping you get a loan for your business, ask them about their contract and what different terms mean. They should be happy to help you understand, since an educated client is a better client. By thoroughly analyzing contracts and asking detailed and specific questions, you can ensure that they are acting in an honest and upfront way.
If you are new to taking out small business loans, take some time to look through examples of different kinds of loans and financial products. Loan terms are predictable and consistent and by looking at them you can start to understand the different details and what you should expect. That way, you’ll be able to identify irregularities.
For example, something that would be considered an unusual request, and a definite sign of a scam, would be terms that require a large sum of money up front as a processing fee or as the lender’s way of protecting themselves. If a supposed lender asks for this, you know they are a scammer.
If the lender uses a random Gmail, Yahoo, or other free email address, this is a big red flag. If this is the case, and it doesn’t seem like they have a valid website, you should cease communications. All reputable businesses, not just lenders, should have official business email addresses that are in line with their website.
You should also look at the phone number they are using. Is it registered to their company? If you type it into Google does their business come up?
Online research about any lender is important, however, there are other resources of information out there. A great way to get information about whether or not any company, not just a lender, is trustworthy is by contacting the Better Business Bureau in your state. The Better Business Bureau also keeps past scam reports online, which can be accessed on their website via their BBB Scam Tracker™.
Another way to gather information on lenders is by looking at reviews. These can provide great insight regarding whether or not a lender is reputable, and they can also inform you about what the lender is like. That said, it is important you ensure the reviews are reputable themselves. You shouldn’t consider a lender as legitimate only because they have positive reviews on their own website. Search around on different websites and see what customers are saying.
Many of the challenges your small business faces are ones that all small businesses are facing. If you notice a scam, report it to the proper authorities so that others, who may not have such a keen eye or who don’t understand what to look for, don’t fall into the trap.
Authorities who you can report scammers to include the Better Business Bureau, who offer an online form for reporting scams, along with the Federal Trade Commission, and the police.
When it comes down to it, the best way to avoid scams is to trust your gut. If a loan is too good to be true, if the contract makes you feel uncomfortable, if the details don’t line up, then move on. As the saying goes, it is always better to be safe than sorry.
In addition, we know how strained cash flow in small businesses can be, and how eager you can be to get a loan. It’s crucial that you don’t allow yourself to rush into loans you haven’t fully considered and researched. Don’t let scammers capitalize on your eagerness to get funds to your business.
At the end of the day, scammers and disreputable companies are a common place issue in the small business world. Many businesses have fallen victim to them in the past and, sadly, many will in the future. When this happens, the results can be disastrous, with outcomes being as unfortunate as bankruptcy. By looking for some of the signals we’ve detailed above and using your own common sense and good judgement, you can make sure that the next loan your business signs up for won’t be the last one.
March 20, 2023
March 17, 2023
March 16, 2023