Considering online funding? As a small business owner, no one needs to tell you that getting a loan from traditional banks can be a real crapshoot, whether it’s a business or a personal loan. Far more often than not, when a small business rolls the dice and asks for a loan, they get double sixes and walk away empty-handed. Nationally, banks reject small business loan applications 80 percent of the time, on average.
A new form of online funding has arisen in recent years. This source promises to be more willing to loan small businesses the money they need to start a company, hire employees, pay their employees’ next paychecks, expand operations, and buy or lease new equipment. Online funding/loan and cash advances have filled a big gap in the capital pipeline, but in several cases, the payout has not been worth the gamble. Many small businesses have been stuck with high-interest loans laden with hidden fees and sky-high monthly payments.
This isn’t to say there aren’t good online lending companies. There are those who are more lenient with their repayment terms. But as with anything on the Internet, there are a lot of unscrupulous operators online, and they aren’t looking to help you or your business. Quite the opposite… they’re out to scam you. Like a crooked card dealer, they want to deal you a bad hand so they can steal your credit, your good name, and anything else they can grab before you catch on that you’ve been had.
No one likes being played for a sucker, especially when you are just trying to handle your business’s financial needs. So, how can you protect your small business and even the odds so that, when you make an online funding/loan application or apply for a cash advance, you’re not really funding someone else’s scam?
Five Things to Look for in an Online Funding or Cash Advance Company
1. No Contact Information
Before you do anything else, the first sign to look for to see if an online lender is legit is the simplest task to perform. If you can’t easily find the company’s address and telephone number on the website, that’s a very bad sign. When you do find the info, if the address is only a P.O. Box, leave. If there’s a physical address, look it up on the Google Maps Street View feature. Is it an office? Or is it a home, apartment, or worst of all, an empty field? If an office, how many other companies share that same address? Believe it or not, there are firms that lease the same office suite to dozens of companies so that they will have a physical address. No one is ever in that office, of course.
Closely related to that is the email address. A legitimate company will have its own email address that matches the firm’s URL. If the contact information is for a generic address, such as Gmail, Yahoo, Hotmail, or some other free email service, bail out.
2. Guaranteed Loan
This should be an obvious red flag. No legitimate lender would ever guarantee a loan before knowing anything about you. Read the fine print… this loan is sure to come with an interest rate in the stratosphere or have fees for nearly everything under the sun. Even worse, they may promise a guaranteed loan but leave you instead with a guaranteed nightmare when they steal your information. Save yourself the trouble. Walk away from any “deal” like this.
3. Too Aggressive
Who hasn’t bought a used car at some point in their life? If you’ve ever had a pushy salesperson, what was your instinct? To run, right? Same with online loans. If you’ve contacted the lender and that person seems pushy, wants you to make a quick decision, seems hesitant to answer more than a few questions, or gets angry when you ask for additional options, then you’re very likely dealing with someone out to pad their bank account, not yours. Take a pass.
4. Money Upfront
If you’re asked for money upfront to get a loan, flee immediately. No legitimate lender will ask for money upfront before approving a loan. When you pay money upfront, what’s very likely to happen is that money – and the lender – will quickly disappear. Don’t do it. Ever.
5. The Best Advice of All – If it Sounds Too Good to Be True, it Probably Is
We saved the best one for last. Actually, this is the only one you really need, isn’t it? Like any other business, lenders need to make money from their services. As a small business owner, you certainly don’t begrudge anyone for making money. But if someone offers you a “deal” that sounds like a dream come true, you need to ask yourself, is it really a dream, or a nightmare waiting to happen? Why would someone offer a loan that seems to offer all the benefits to you? They wouldn’t. Any business needs to make a return. Even unsecured loans, which don’t ask for collateral, still look at your creditworthiness (if you have a good credit history) to determine risk.
If you’re staring at a loan deal that sounds too good to be true, you can bet it is. The lender will get something in return – something you may not have counted on. For example, online lenders often express interest as “simple interest.” The truth is, “simple interest” is anything but simple, and the actual APR (the annual percentage rate) can often be four to eight times the amount stated. And, in some cases, even more! Make sure that your terms are not expressed as simple interest, so you know your true cost of borrowing. This is not to say every “too good to be true” deal is a scam. Just like not every online lender that matches one of these tips is a scammer. But do you really want to take that chance? Move on while you can.
If you are considering an online loan or cash advance, do your due diligence. If something doesn’t seem right, if you aren’t comfortable, then that’s your intuition warning you of danger. Heed those warnings.
There is another, less risky way to raise money for your small business. This option is called invoice factoring. Invoice factoring allows you to “sell” your accounts receivable invoices to a third party. This third party pays you upfront for outstanding invoices, giving you the cash you need today to run your business, and eliminating the worry and hassle of slow pay collections, leaving you free to run your business.
Factoring is an Alternative Way to Fund Your Business
Invoice factoring is a convenient alternative to a traditional commercial bank loan or fee-laden online loans. Factoring gives you the money you need when you need it with a flexible term length and no long-term obligations. You can also get cash quicker through invoice factoring – usually within a day or two. You also don’t need to worry about having excellent credit because factoring companies will look at your customers’ credit profiles rather than that of your business. A factoring company will also not require you to have a specific loan purpose: if you sell your invoices, you can spend the money on what your business needs, whether it be for payroll, equipment, or maintenance.
Work with a Provider That’s Backed by Decades in the Industry
If you would like to learn more about how invoice factoring works, request a complimentary rate quote from Charter Capital. You may find it to be the best hand you’ve been dealt in a long time.
FAQs About Online Funding Risks and Scams
How do phishing scams target small businesses applying for online loans?
Scammers set up fake loan applications to harvest sensitive business information, including bank account numbers and tax identification details. They dress it up to look like a real lender and reach out through unsolicited emails or texts. If you land on an unfamiliar site or get cold-contacted out of nowhere, pump the brakes. Check for the same red flags covered in the article above: no real contact information, generic email addresses, and other tells of a con.
How do scammers impersonate the Small Business Administration to appear legitimate?
They use the SBA name, logo, and official-sounding language to get business owners to hand over credentials. It looks credible on the surface, and that is exactly what they are counting on. What you need to know is that the SBA does not cold-call or cold-email business owners about loans. If someone reaches out to you first, claiming to be the SBA, treat it like a dealer sliding an ace from their sleeve. Report it to the Office of Inspector General and walk away.
What should you do if you suspect you have fallen victim to a loan scam?
Do not wait. Call your bank and flag every suspicious transaction you can identify. Then file a report with the Federal Trade Commission at ReportFraud.ftc.gov. If you handed over business or personal credentials, place a fraud alert on your credit file today. The longer you sit on it, the more damage is done. You got dealt a bad hand; the best move now is to cut your losses fast.
What information should you never share with an unverified lender?
Bank account numbers, Social Security numbers, and tax identification details should not go anywhere until you know exactly who you are dealing with. If a lender is asking for that kind of sensitive information over the phone or by email before any formal application has begun, that is your signal to fold. Once a scammer has that information, they can do serious damage to your business and your personal finances.
How can you verify that an online lender is legitimate before applying?
Run the lender’s name through the Better Business Bureau and your state’s financial regulatory authority before you go any further. A legitimate lender is registered, transparent about fees and terms, and will not pressure you into a quick decision. If they are rushing you, that is your used car salesperson alarm going off. Trust it.
- What is an Invoice Factoring Broker? - July 17, 2022
- 7 Tips for Buying Out a Business Partner or Majority Owner - May 13, 2022
- 6 Leadership Secrets Every Small Business Owner Should Know - December 9, 2021
