There comes a time when you will require small business loans or financing to increase capital for various things, including covering operational costs, expanding your company’s facility, purchasing new equipment, or hiring and training employees. Unfortunately, small business loan scams have become increasingly common in recent years, causing many business owners to suffer financial losses. Scammers are on the prowl and ready to take advantage of the opportunity to defraud small business owners looking for loans and business financing.

According to the Federal Trade Commission (FTC), in 2020, small business owners reported losing over $2.1 billion to fraud. However, this figure includes all types of fraud, not just business loan scams. The FTC also reported that there was a significant increase in fraud reports during the COVID-19 pandemic, as scammers took advantage of the economic uncertainty to target vulnerable businesses. It’s crucial to remain vigilant and informed about the different types of scams and how to evade them.

And that is why we want to share the 6 common small business financing scams and how to avoid them before it’s too late.

Advance fee scam

In this type of scam, a lender asks for an upfront fee to secure a loan or business financing. They may say that the fee is for processing, paperwork, or to ensure that you are serious about the loan. Once the fee is paid, the lender disappears, and the loan never materializes.

To avoid this scam, never pay upfront fees for a loan or business financing. Legitimate lenders will typically deduct any fees from the loan amount once it is disbursed and will not ask for money upfront.

Phishing scam

Phishing scams involve scammers sending emails or text messages posing as legitimate lenders. They may ask for personal or financial information to process a loan application and then use the information to commit identity theft or fraud.

Be wary of unsolicited emails or text messages from those posing as lenders to avoid this scam. Legitimate lenders will typically not contact you out of the blue and will not ask for personal information over email or text. What’s more, always check the email address or phone number. Moreover, a lender will always use their business email address and never a Gmail or other “personal” email address.

Business Loan Flipping

Loan flipping involves a lender encouraging a borrower to repeatedly refinance their loan, charging high fees and interest rates each time. The borrower ends up with a larger loan balance and higher monthly payments, and the lender earns more money from the fees and interest.

To avoid this scam, carefully read all loan documents and ensure you understand the terms and conditions. Avoid repeatedly refinancing your loan unless it is necessary or financially beneficial.

Fake Loan Brokers

Fake loan brokers pretend to be intermediaries between borrowers and lenders. They may offer to find loans for small businesses, but they have no connections to legitimate lenders. They are simply looking to collect upfront fees or steal personal information.

Always research loan brokers before working with them. Check their credentials and reviews and ensure they are registered with the National Mortgage Licensing System (NMLS).

Overcharging For Services

Some lenders may offer to provide additional services, such as credit repair or loan modification, for a fee. However, these services may be unnecessary or even fraudulent. The lender may charge high fees and fail to deliver the promised results, leaving you in a worse financial situation.

Carefully review all loan or business financing documents and ensure you understand the fees and services offered. Avoid paying for unnecessary or overpriced services.

Fake Loans

In some cases, scammers may offer loans that do not exist. They may advertise low-interest rates and easy approval, but once the borrower applies, the lender disappears, and the loan never materializes.

To avoid this scam, only work with reputable lenders. Research the lender’s credentials and reviews, and be wary of any lender that promises unrealistic interest rates or approvals.

In conclusion, small business loan scams can be costly and devastating for business owners. To avoid falling victim to these scams, it is important to be vigilant and cautious when seeking out loans. Always research lenders and loan brokers before working with them, carefully review all loan documents and avoid paying upfront fees.

While it’s important to be aware of the various business loan scams out there, it’s also important to recognize that not all lending platforms are created equal. ByzFunder is a legitimate and trustworthy option for small business owners who need funding. With a commitment to transparency and fair lending practices, we have helped thousands of businesses achieve their goals. So, if you’re looking for a safe and reliable way to fund your business, ByzFunder is a great place to start.

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