From charity and phishing scams to pandemic debt settlement scams, business loan fraud issues are at their worst ever today, and scammers continue to find innovative ways to prey on the unwary. Many firms rely on business loans, yet business lending is also plagued with scams. Fraudsters operate both within and outside the United States, extorting money from business owners who are unaware of how the process works. The phenomenal rise of the online lending industry has made obtaining business loans quick and easy. Unfortunately, this has also exponentially increased small business loan frauds, and the unpredictable market due to the pandemic and the war has made entrepreneurs more vulnerable to these traps.
This article will help you understand the types of business loan scams, how to detect them, and what to do when you are in a loan scam to protect yourself from fraud that can hurt your business.
Types of Loan Scams
A business loan fraud is any deceptive activity wherein a person or an organization impersonating a provider gathers your confidential information and fails to provide the money you requested. Here are the ten most widespread loan scams and the tricks scammers use to target unsuspecting businesses:
Advance-Fee Loan Scams
A low-interest loan will be offered to you in exchange for upfront costs, usually under the pretext of an “application cost”, a “one-time charge,” or a “service charge” in an advance-fee lending scam. They guarantee that anyone can be approved for their low-interest fraud business loans without reviewing their credit score.
If you claim you can’t make an upfront fee, the fraudster will offer to add it to your loan balance and then make a bogus ACH (automated clearing house) deposit to your bank account for the complete amount. One thing you should know is that reputed lenders may also collect initial payments. For example, before closing a loan, banks frequently levy upfront application fees, credit report fees, and so on.
Be sure to research your lender. For small business owners, credible and experienced online financial firms like FundKite have proven of great value.
Phishing Scams
Phishing is an email scam that cybercriminals use to obtain confidential information such as bank account numbers, social security numbers, passwords, and so on. Phishers psychologically manipulate you to obtain this data to sign in to your e-mail, bank, and other accounts to extort money. To evade any suspicion, phishing emails can include business logos you recognize. They will request that you open an attachment or update your payment. They may also inform you that there has been unusual activity on your email address to obtain information. They will emotionally influence you into providing your personal information by instilling fear in you. Before you know it, the phisher would have stolen your money, locked you out of your account, and stolen your identity. Make sure to review the sender’s email address for authenticity, check for grammatical issues in the e-mail, and call the relevant organization’s customer service department to confirm the information provided in the e-mail before making a payment.
Debt Settlement and Debt Relief Scams
Licensed lenders for commercial debt relief and debt settlement firms do demand a fee. However, the charge is only processed once the lenders approach your creditors and come to an agreement. Be cautious of those who promise you sure approval.
Legitimate financiers will notify your company if it has fallen behind on repayments; they will not use inappropriate language or compel you to transfer funds. If you receive a phone or e-mail warning an arrest warrant or criminal charges against you, report it to the FTC and dismiss it. Harassing consumers for loan missed payments is illegal. Contact your account manager to figure out a repayment schedule.
The majority of small businesses fail to owe to a lack of working capital. Consider using FundKite to finance your outstanding loans. It will not lessen your loan, but it will help you move your business forward as well as manage monthly mortgage payments.
Credit Repair Scams
Your credit history is the most crucial component of your financial data, whether you are applying for a corporate credit card, loan, or seeking funding. Young entrepreneurs are more susceptible to credit restoration scams since they haven’t yet earned a substantial commercial credit history. Scammers pretend to own services that help you erase your bad credit history and elevate your credit score so you can get the best loans. There are reputable businesses that can assist you in repairing your credit scores, but this is nothing you can’t do on your own. You cannot fix your credit score overnight. Rebuilding your credit might take weeks, if not months. You should be wary of scammers who ask you for an advance fee to raise your credit points.
If you have a great business plan and want to improve your credit score for a business loan, there are many financiers who will partner with you even if you have low credit or short commercial credit history.
Peer-to-Peer Lending Scams
Peer-to-peer (P2P) lending sites have grown in popularity as a source of business loan funding, and several companies have succeeded in utilizing these platforms. These websites offer loans to numerous investors who can choose to buy a loan or a percentage of a loan that passes certain credit requirements. So, rather than a bank or firm acting as your creditor, several investors serve as your lender simultaneously. Fraudsters masquerade as prospective lenders and offer fraud business loans without conducting a credit analysis. Demand for upfront payments, wire transfers, and/or guaranteeing money or filing an application before conducting a credit check are all red flags for P2P frauds.
Together with collecting your money, these so-called peer lenders may also ask for private information like your complete name, birth date, and Social Security number to perform their fraudulent verification process. Do your research in advance to ensure you’re working with a legitimate business with a strong track record if you’re interested in this form of capital. If you fall victim to a P2P lending scam, the fraudster can seize both your funds and your identity.
Consultation Fee Scams
A consultant or agent contacts you via email in a consultancy fee scam to assist you in getting a business loan or funding. They will sell you the idea that getting a business loan can be a complicated process that requires a lot of paperwork and a consultant to obtain a better bargain. Similar to the advance-fee scam, the scammer will ask you for an upfront payment for their work, after which they disappear. While some agents and consultants provide such services, they do not take an advance fee from clients and work on a percentage-based model.
Funding Kits Scams
Similar to the consulting scam, funding kit scams lead you to believe that getting a government loan with a low-interest rate (For example, an SBA Loan) is extremely difficult without the con artists’ assistance. They may also call or email you as a government impersonator, claiming your company is eligible for a government grant and that you will require their assistance with the paperwork and requesting an advance fee. The US government does not solicit grants from anyone over a call. It is simple to receive government-approved low-interest business loans, and the information is readily available on the US government website.
Ghost Investor Scams
A ghost investor scam begins when a fraud agent or a wealthy investor from a major trust contacts you and offers you funding for your business. They will reach out to you via e-mail or LinkedIn. Unlike real investors, the scammers will not want to hear your elevator pitch; instead, they will carry out a background check. You will be asked for your social security number, business tax ID, name, and other financial information. They will request an advance fee to conduct this background check.
These scams not only steal your money but also capture your confidential data and utilize it for various types of fraudulent activities. Finding an investor is a challenging task. As an entrepreneur, you must network, create a strong business plan and an elevator pitch, and meet with dozens of potential investors to find the right one.
How to Detect a Loan Scam
Because smaller companies are not seen as targets in the same way that consumers are, loan fraud against them is not as prevalent as loan fraud against individuals. It is difficult to identify such frauds and take action against them since there are not many regulations to prevent them. Because of the high value of these business loan frauds, small businesses need to detect such fraud business loan scams and successfully combat them. Here are a few signs of a business loan scam:
- Requesting an advanced payment
- The company has no physical presence
- Mailing from a generic “@gmail.com” or “@yahoo.com” instead of a company e-mail address
- A guaranteed loan or investment approval
- Terms and conditions that are extremely basic
- Grammatical and spelling errors on e-mails and fraudulent contract documents
- Advertisements on Craigslist, Reddit, Facebook, etc.
- Cold-calling or sending an e-mail without you inquiring about it
- Asking for a prepaid debit card, gift card, or wire transfer
- Requesting a prepaid debit card, gift card, or wire money
- Inducing unwarranted panic or an emergency scenario.
What If You Are in a Loan Scam
- File a fraudulent report regarding internet-related scams with the Internet Crime Complaint Center as well as your state’s Attorney General and local police department.
- Report the loan scam to the Consumer Financial Protection Bureau and Bureau of Justice Assistance (BJA). In case you have shared confidential information with the scammer, report identity theft to Federal Trade Commission (FTC).
- File a police complaint in your locality. Even if the fraudster cannot be detected, it is important to file a police complaint.
- Contact the credit bureaus and lodge a fraudulent alert if the scammer stealing your confidential information. This will let lenders be aware if someone tries to apply for credit under your name.
- Notify your banks and freeze all your debit and credit cards.
According to a 2021 Federal Trade Commission report, consumers lost almost $770 million to fraudsters, while investment scams were at the top of the list of total reported dollar losses. When it comes to loans, knowing which ones are fraudulent business loans is just as crucial as finding the best solution for your financial circumstances. When seeking a business loan, be careful to avoid falling into the traps set by swindlers. As technology progresses, these business loan scams continue to grow rampant. Finally, before seeking any business loan, do thorough research on the lender.
