How to Spot a Predatory Small Business Lender – 7 Red Flags and Warning Signs
As a small business owner, manifesting your vision into a thriving and successful venture is the ultimate goal, and one of the most important steps to getting there may be securing a small business loan.
Lenders come in all shapes and sizes these days, and with the proliferation of financial technology companies, it can become increasingly challenging for business owners to distinguish a fraudulent or predatory lender from a legitimate lender who has your best interest (pun intended) in mind.
Predatory lenders include any lending practice whose terms are unfair or outright abusive, using tactics such as deception, coercion and exploitation to prey on small business owners. They may use different guises to mislead you into thinking that conducting business with them is a good idea, often resulting in a bad deal for the borrower.
At Lendified, we’re not only here as an alternative lending solution for small business owners, but we’re also here to educate and inspire you to learn more about lending transactions so that you can make well-informed decisions that best suit your business needs. We want to equip you with the knowledge that you need to make better borrowing decisions with greater confidence so that you can focus your time on things that actually matter – like growing your business.
Here are 7 “red flags” to look out for when sourcing out capital for your small business:
1) Guaranteed Acceptance:
While a guaranteed loan might sound very appealing, there is very little truth to substantiate these types of lending transactions. Realistically, it is not possible for a credible lender to offer “Guaranteed Acceptance” to anyone willing to fill out an application. There are individuals who simply pose too great a risk for lenders, such as those who have filed for bankruptcy or those with extremely poor credit scores. As such, legitimate lenders have to verify that prospective borrowers are able to repay their loans.
2) Impossibly Low Rates:
Thanks to the new sharing economy, alternative lending solutions are increasingly offering competitive, low rates to potential borrowers. Having said that, if the rates are hovering well below what’s typically available, beware. When it sounds too good to be true, it probably is. Be sure to read the fine print and understand the rates and fee structure before diving in. Unscrupulous lenders will often charge extraordinarily high interest rates and fees that could put a financial strain on businesses in the future.
3) Over-Hyped, High-Pressure Ads:
Fraudulent or shady lenders will often target those who are most susceptible and vulnerable to their schemes by pressuring them into making quick and hasty decisions. They most often target those who are in dire need of financial assistance, or individuals with a poor credit rating. Here at Lendified, we understand that responsible and successful new business owners can find themselves in a situation where they urgently need cash flow, either to mitigate a crisis or to take advantage of once-in-a-lifetime opportunities. We’re here to provide a solution, not place additional pressure. We encourage small business owners to make smart, sound borrowing decisions.
4) Requests for Down Payments or Upfront Fees:
Be cautious of Loan brokers who insist that you make a down payment before they can help you look for a loan. While it’s normal to pay an origination or processing fee at the outset, most reputable loan brokers out there will not ask for payment until after your small business loan application has been accepted.
5) Requesting Personal Information Without Proper Documentations:
If a company is asking you for sensitive information over the phone, email or without providing you with legitimate paperwork to support its intended use – chances are, you are dealing with a scammer. Personal information like your Social Insurance Number (SIN), Bank Account information or even your credit card number should be extremely safeguarded. Request documentation, and do your due diligence on the company before providing private information. Protecting yourself from a scam or identity theft is much easier than recovering from one – ask questions and do your homework.
6) Lack of Web Presence or Insufficient Content:
7) No Physical Address
The lack of a physical address should immediately set off alarm bells, even if they are an online-based financial lender. Ask for a mailing address, but be extra wary if they provide you with a P.O box address; fraudulent operations will routinely set up P.O boxes that are then forwarded off to their operations at a different (untraceable) location.
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About the Author
Lendified is Canada's premier online lender for small businesses. The company was founded by former bank executives dedicated to provide businesses with fast, easy, and affordable financing. The Lendified team regularly produces blogs and guides to help small business owners succeed.