Sharks in the Water: Watch Out for Predatory Lenders
Whether you’re an entrepreneur seeking start-up funds or the owner of an established business that needs capital to make an acquisition or develop new product lines, be careful when looking for a lender. To avoid fraudsters and potentially dire consequences, you need to take your time and carefully screen anyone eager to lend you money. After all, there must be something in it for them. Ensure that those motivations are honest.
Signs signifying trouble
Predatory lenders often offer loans with punitive terms and conditions and nonrefundable upfront fees. They especially target businesses with a checkered history or inadequate collateral because they know such borrowers have fewer options and may be more willing to compromise. To tempt borrowers, bad actors might advertise a quick closing or a willingness to skip due diligence.
Another red flag is when a lender demands an upfront loan application fee. Some false lenders don’t actually make money from issuing loans, but by charging fees for loans they never intend to make. These “lenders” may claim they’ll refund your application fee and then disappear. And don’t assume you can use a credit card and simply contest an application fee charge if the lender proves to be illegitimate. That approach may work in certain situations. However, sophisticated fraudsters can dissolve their business once the volume of disputes becomes significant and they start attracting attention. At that point, you may be out of luck.
Best practices
Even if your business is small or has a history of financial distress, don’t act out of desperation. The wrong loan can be fatal to your company. Instead, contact a range of reputable lenders — national names, midsized institutions and community banks — to assess their interest. Even if a bank turns you down, the loan officer may be willing to explain why you didn’t qualify and provide tips for strengthening your application.
In addition, your professional advisors or fellow business owners may be able to make referrals and introductions. And if you haven’t already done so, ask about a loan from the bank where your business holds deposit accounts. Every bank has its own underwriting guidelines, but you’re more likely to hear “yes” and get a decent rate and terms if you’re a long-time customer with a good track record.
On the other hand, skeptically view unsolicited loan offers via phone, email or text. Many people behind these messages aren’t lenders but identity thieves hoping to trick you into giving them personal and financial information. And if you vet lenders online, be wary. Some business rating sites allow companies to pay for endorsements or request the removal of negative reviews. Reviewing multiple rating sites to get a broader view of a lender’s business practices is more likely to provide you with accurate information.
Before choosing equity
Broadcasting your intention to borrow might attract lenders — as well as potential investors. But before you change course and agree to equity financing, talk to us about the possible financial ramifications for your company. You’ll also need to conduct background checks on the principals and meet face-to-face to discuss their motivations, management approach and industry experience. Your attorney should review any legal paperwork before you sign it. Contact us for more information and financial advice.
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