Getting the funding you need is a critical part of managing your business and its cash flow. When important equipment breaks and you need a replacement immediately, getting a loan quickly is essential. However, because many banks refuse to loan to small businesses, entrepreneurs are turning to alternative lenders for financing. As good as some of these services seem to be, scams are everywhere, and business owners could be risking everything in their search for a loan if they aren’t careful.
From banks to alternative lenders
If you are a business owner, you’ve probably experienced rejection from a bank in the last few years. The number of small business bank loan approvals all but completely dried up after the recession. Even though approval rates are now gradually starting to rise, it’s still incredibly tough for small business owners, particularly new ones, to acquire business funding.
As a result, more and more business owners are turning to alternative lenders to get the funding they need. These alternative funding companies are often based online and are much smaller than traditional lenders. While traditional lenders such as banks are required to comply with a long list of rules and regulations, alternative funds operate without traditional banking regulations, which has some disadvantages to your business in terms of oversight. But these traditional lenders also have some advantages. Approval rates are usually much higher than banks, and approval times are much faster, too. In fact, when you apply to one of these alternative lenders, you could have your money in a matter of days.
For all the advantages of these alternative lenders, issues persist. As relatively new entrants into the industry, they aren’t the most regulated of companies. They can get away with things—not showing the actual APR, for instance—that traditional lenders can’t. There’s also the issue of reputation. Some alternative lenders are much more reputable than others. While some are providing a much-needed service for businesses in a reputable and commercially-reasonable manner, others are fly-by-night companies that are just out to make a quick buck. Some of the so-called “alternative lenders” are not lenders at all -- they are just brokers who are just after your personal details, which they sell to as many companies as they can. Sometimes, they use unscrupulous methods to get your information, because a lot of these companies aren’t worried about how they get the information...as long as they get it!
Popular business loan scams and red flags
If you’re considering financing your business needs with an alternative lender, it’s important that you do your homework. Failure to do so could result in sky-high fees, a drop in your credit rating and a big financial loss.
Remember, if the terms sound too good to be true, you probably are not being told the whole story.
The next time you need business financing, keep these red flags and possible scams in mind.
Lender asks for money in advance
Legitimate lenders might ask you for certain fees, such as an application fee, an appraisal fee, or a fee to pull your credit report. Legitimate lenders are up-front about these fees, and they disclose them right away. Most of the time, the fees will be deducted from the amount you are being funded. Compare that to scam lenders, who sometimes tell you that your business has been approved for a loan, but then suddenly ask for a “fee” before they will fund you. And they want the “fee” upfront! If you’re asked to front cash before getting your loan, turn around and run.
You can’t find out much about them
Alternative lenders may be the new game in town, but that doesn’t mean that there shouldn’t be a significant amount of information available about them online.
Any legitimate lender will have a fleshed-out website with plenty of information about the company, and sometimes information about the fine print of the loans and other types of business financing hey offer. Even if the company approached you offline, they should still have a website that you can review to see if the company looks legitimate.
If you find yourself wondering who the company is and where they have come from, consider it a red flag. Trust your gut. Google the company name to find out more information; also, and consider Googling “[Company name] scam” to see if any other business owners have had a bad experience with them.
They use an unsecured website
This red flag is an easy one to check. When you look at the lender’s website, there should be the word “secure” and an image of a padlock in front of the website address (the “URL”).
The URL should also start with https:// rather than http://. The ‘s’ means that the website has a valid SSL certificate and is secure.
Whether you’re getting a loan or making any other kind of financial transaction, never do so on a website that is not secure (“https”). If the website isn’t secure, there is nothing to stop the website owner or anyone else from stealing your information.
Unfortunately, some businesses that need cash don’t have the best credit ratings. A particularly nasty form of lender has popped up to target these businesses with the promise of a cash advance without credit checks.
If the term “cash advance” is ever mentioned on the website or in the paperwork along with the words “no credit check,” stop what you’re doing. If a lender says it can guarantee you a rate before checking your personal or business credit, it probably isn’t a reputable lender. If it is a reputable lender, it probably doesn’t have any intention of giving you a loan without checking your credit. It is a type of bait-and-switch. Once they have you “in the door,” they will try to fund you ith a loan that hash sky-high interest rates and impossible terms.
Instead of getting funding, try consolidating or restructuring your debt
With all these red flags, giving your business a cash injection can seem like a risky move. But it doesn’t have to be. Instead of taking out a loan, why not reduce your debts instead? If you reduce your debt, you don’t have to spend as much paying them off each month. If you pay them off altogether, you suddenly have a lump sum each month that you can use as needed.
Businesses with multiple debts from several different agents may find it easier to consolidate those debts into one single, manageable payment. Not only does consolidation make it easier to keep track of your debt, but it may also even save you money on your debts in the long run. Businesses with one large debt may find it a better solution to restructure their debt and negotiate a single payment or series of payments that are easier for the business to afford. This solution doesn’t just offer businesses the opportunity to pay off their debt in one shot; it can sometimes mean paying off only a fraction of the debt rather than the whole amount.
Proceeding with a debt consolidation or restructuring strategy can be difficult. It is highly recommended that you seek the help of a business debt expert like Creditors Relief. We’ve already restructured millions of dollars in debts for businesses just like yours and we're waiting to help you, too.
To become another of our successful clients, call 877-312-6478 for a free consultation on your debts.