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“Guaranteed loan approval; receive funds in 24 hours.” “No credit check; interest rates starting at 0%; only low application fee required.” These statements may sound pretty good to a small-business owner in desperate need of capital.
But, as the old saying goes, “If something sounds too good to be true, it probably is,” says Carolina Martinez, CEO of CAMEO, California’s statewide micro-business network. Just because it’s the most frequent appealing solution you’re hearing doesn’t mean it’s the right solution, she says.
Many small businesses are still recovering from the financial impact of the COVID-19 pandemic, and with the end of the Paycheck Protection Program and bank loan approvals below 20%, scammers and predatory lenders are taking the opportunity to move in on businesses that are searching for funding.
Protect yourself from potential bad actors and find legitimate capital for your business with these four tips.
1. Be wary of speed
Fast isn’t always better when you’re looking for business funding. “Be wary of the speed sell,” says Tom McHale, president of Pursuit, a community lender operating in New Jersey, New York and Pennsylvania.
Although some online lenders excel in terms of speed, predatory lenders can rush you through the loan process to push you into an expensive product without fully understanding the terms.
“You're going to pay significantly higher rates and fees for that money than you would for traditional financing that might take a little more time,” McHale says.
He recommends that businesses look for lenders that allow them to speak to a representative directly — rather than just a bot or live chat — so that you can ask questions and understand the loan’s terms and conditions.
And if a lender is unwilling to show you the terms and rates of the loan upfront, that’s a red flag.
2. Never pay money upfront
“Don’t pay money upfront for an opportunity to get a loan,” says Frank LaMonaca, chair of the Southeastern Connecticut chapter of SCORE, a network of volunteer mentors that supports small businesses across the country. “You shouldn’t have to ever do that.”
A reputable online lender won't charge any fees unless you're approved for a loan. If a lender wants money just to look at your application, that's a dead giveaway, La Monaca says.
“Nobody should be asking you for $2,500 to apply for a loan. You should be able to apply free of charge,” he says.
Similarly, don’t trust emails that appear to be from government agencies asking for personal information such as your Social Security number, requesting payment upfront or guaranteeing loan approval. The U.S. Small Business Administration recommends being on the lookout for these phishing scams, as well as other types of grant fraud and loan fraud, especially those related to COVID-19 relief assistance.
3. Explore all of your lending options
Businesses may have more options available for financing than they realize.
Understand your power in the marketplace, LaMonaca says. There is a variety of loan programs to choose from, including those designated for specific types of businesses, such as women-owned businesses, minority-owned businesses and veteran-owned businesses.
Community development financial institutions, known as CDFIs, nonprofit lenders and reliable online financial service companies can offer loans with affordable rates and competitive terms — even for new businesses or those that can’t qualify for bank funding.
Some of these lenders, like CDFIs, may be able to help businesses burdened with predatory loans refinance into better products, Martinez says.
You can search for local CDFIs through the SBA website, as well as through organizations like Opportunity Finance Network, the national association of CDFIs. Reading reviews and referring to resources like the Small Business Borrowers’ Bill of Rights can help you find reliable online lenders as well.
4. Surround yourself with the right experts
If you’re unsure of how to find the right financing for your business needs — or want to make sure that you’re not signing onto a bad deal — turn to the experts. You can work with an accountant, lawyer or other financial expert to help you through the process and to even review your loan application and agreement.
The majority of CDFIs are equipped with an entire ecosystem of support to help small businesses assess their financial status, business models and strategies, as well as access capital, Martinez says.
Additionally, organizations like SCORE and local SBA-administered Small Business Development Centers offer business consulting services for free. You can search their websites to find experts in your area to work with your business, and browse additional online resources.
LaMonaca stresses the importance of building a team and fostering relationships to help you run your business: The best business owners don't go it alone. “The best have really good people around them,” he says.