The advancement in the lending industry has made it easier for lenders to integrate technology into the loan process to make funding easier for small business owners. Unluckily, this advancement also gives a blank check to business loan scams online.

According to the Better Business Bureau (BBB) and the Federal Trade Commission (FTC) survey of 1,200 small businesses nationwide, 67% of small businesses said scammers are a growing risk now in comparison to three years ago. Preventing such scams is often difficult because scammers disguise as reputable lenders, big corporations, and trusted brands.

There are many genuine and reliable online lenders trying to help small businesses grow. However, there are hackers and con artists as well that are capitalizing on small business owners’ need for quick funding via scams. These scammers attempt to embezzle valuable assets like personal data, business information and money by masquerading to be reputable small business loan lenders or brokers.

Despite all these scammers and Ponzi schemes, there are various ways to avoid and report such financial scams so you can recuperate. Here’s a detailed guide on how to become a shrewder and sensible borrower and avoid such scams.

Business Loan Scams to Avoid

Even though small businesses have access to a multitude of reliable and constructive financing opportunities, you do need to look out for some of the deceitful, self-proclaimed lending institutions or loan brokers.

They usually get in touch with you online, via advertising, phone, text messages, and direct mail channels. The key is to remain discreet when someone asks you for personal and business information or trick you to make money by clicking a link. Before agreeing to any contracts or send anyone your personal information, ascertain you’re conscious of and vigilant against common business loans scams. Here are some common business loan scams to keep an eye on while applying for business loans:

  • Advance Fee Scams
  • P2P Lending Scams
  • Grant-Related Scams
  • Credit Repair Scams
  • Ghost Funding Scams
  • Duplicitous Loan Brokers
  • Debt Relief Scams
  • Debt Collection Scams
  1. Advance Fee Scams

This scam involves when someone offers quick low-priced debt in exchange for an upfront payment as an application fee, or a processing fee. They want a down payment before approving you for a loan. The advance-fee scams are among the top five marketplace scams. These scammers will also claim to approve you for a low-rate loan even with poor credit and history or bankruptcy. This is definitely a warning signal, since most lenders have minimum credit score requirements and constraints on bankruptcies, except for expensive merchant cash advance companies. In reality, with a low or poor credit score, you’ll likely get a lower amount and higher interest rates.

While being cautious about advance-fee scams, you should also understand the fact that reputable lenders also charge upfront fees. For instance, traditional lenders and banks usually charge upfront fees such as application fees, underwriting fees, origination fees, and credit check fees before approving your business loan application.

If you ever encounter with an online lender, especially the one you’ve never heard of before, who directly ask you for upfront money, give the cold shoulder.

  1. P2P Lending Scams

Peer to Peer (P2P) lending platforms like Upstart, Funding Circle, and Prosper Marketplace has become an increasingly popular source of business loan funding. Each platform has a huge network of investors, who decide to buy a loan or a portion of it that meets their preferred credit criteria. The network of investors collectively acts as your lender in P2P lending.

Regrettably, numerous dishonest peer lenders are using social networks and apps to exploit unwary entrepreneurs. The characteristic of peer lending scam is similar to the advance fee scam with the difference that an individual offers a peer loan instead of a bogus business. Such lenders usually require an upfront payment to secure your loan—along with your sensitive personal data to complete their bogus background checks.

The best way to avoid P2P lending scams is to get help from reputable lenders when considering peer-to-peer borrowing opportunities. Work prudently and neither offer any upfront payment nor use any money wiring services for a business loan.

  1. Grant-Related Scams

You will also find numerous lenders who will often ask you to pay them to help you go through the loan process. Simply forbear this! In such business loan scams, they might offer you accessory handy tips to complete your business loan application, secure government grants, or qualify for low-interest business loans.

The fact is that all information you need to secure a business loan is readily available online free and from verified lending marketplaces and institutions like Merchant Advisors. Except for few targeted grants for research and development companies and agriculture businesses, there are no free business grants. Moreover, the federal government will never call anyone to avail of grants. You can get all the information related to government grants on the official website

  1. Credit Repair Scams

Credit history is the most crucial part of your financial record. While applying for a business loan, if someone claims to help you obliterate a bad credit score or build it overnight, don’t buy this! Such types of scams usually occur in the area of personal and business credit repair. Scammers usually target startups since they don’t have a credit history yet.

Even services of verified credit repair companies usually don’t contribute much to the credit ratings. You can take numerous actionable steps on your own to improve your credit score.

Simply don’t trust someone who promises to increase your credit number overnight with a fee upfront. It takes weeks, even months of financial discipline to improve credit. The good news is that you don’t certainly need perfect credit to apply for a business loan. You will find numerous reputable lenders who’re willing to work with you even if you have bad credit.

  1. Ghost Funding Scams

In ghost funding swindle, the scammers are searching for borrowers who’re searching for business funding in the market. They represent themselves as “agents” of big corporations, financial funds, or wealthy angel investors concerned in funding small businesses.

They usually ask for sensitive financial information online including your social security number for a background check, business’s tax ID number, legal papers, or financial statements. Similar to advance fee scams, they might ask for an upfront fee as well. Such scammers use personal data about you and your business for identity theft and other forms of fraud!

Ghost scammers lurk websites that connect borrowers with angel investors and venture capitalists. In order to find legitimate investors, you need to do the heavy lifting in order to build associations, building a pitch deck, and meeting with investors. Securing equity financing is not a simple job that gets you quick money overnight and it actually takes a lot of time to succeed.

  1. Duplicitous Loan Brokers

In this scenario, a duplicitous broker promise to connect you with a legitimate lender. The role of a loan broker is to assist borrowers to find the suitable loan option, arrange all the essential loan documentation, and connect with the lenders that are best suited to your business’s needs.

Even though it’s a legalized service from loan brokers, but when someone asks you for an upfront fee, its scam! Legitimate loan broker services have a commission-based model where a broker gets commission after closing a loan deal and at no cost to you.

  1. Debt Relief Scams

Debt relief scammers target those people who are facing difficulties in maintaining their loan payments. Such scammers promise things like cutting your loan payments in half or forgiving your outstanding debt along with your personal information and business information to analyze your current credit standing and debt. Some might even ask your bank account numbers to start the debt transferring process with an upfront fee.

Keep an eye on those who promise to get you out of debt with a guarantee. In reality, debt relief solutions don’t reduce the debt level. Instead, it simplifies monthly payments by combining multiple loans into one loan with one lower monthly payment at a lower-interest loan or longer-term loan.

In order to sustain your debt, it’s best to contact your lender to work out a lower monthly payments plan or extended terms. Debt relief solutions work best considering you’re working with a reputable lender.

  1. Debt Collection Scams

In debt collection scams, scammers look for borrowers who’re short on loan payments or are unable to repay the loan. If you get a call from someone using harsh tactics or threatens to get you to pay the outstanding debt, it’s a scam. Because reputable lenders will usually devise a repayment plan if a borrower is unable to repay the loan.

Another red flag is if the caller isn’t familiar with your loan details, such as the pending amount or the interest rate. Unless you have a notice in writing from the lender depicting the overdue amount and the creditor name, never pay any overdue debt.

Whenever you’re in doubt, look for legitimate lenders to get the business funding without pondering if you’re about to be conned.

Steps to Avoid Business Loan Scams

We hope after reading through this, you’ll be extra careful moving forward. However, even the shrewd business owners can get into this by mistake. The lending marketplace is growing more complex and more lenders are entering into the small business loans arena, you can’t be too cautious.

If you’re among those business owners who find yourself stuck in a business loan scam, follow these steps to minimize the risk and impact of the scam:

Applying for a business loan can be daunting, especially with the availability of a variety of lenders competing for your small business. Understanding the difference between a legitimate and a scammer is hard. The key is to stay vigilant and ask questions throughout the loan process. Additionally, you can also minimize the risk even if someone manages to con you regardless of your best efforts. Follow the above-mentioned steps right away and stay vigilant going forward.

Small Business Financing News │ Merchant Advisors | blog
How to Avoid and Report Common Business Loan Scams?
How to Avoid and Report Common Business Loan Scams?
Looking for funding to fund your small business? The road ahead is full of twists and turns because it does require a lot of time and research to locate the best funding program that suits your business. Due to theRead more
Here are eight common business loan scams you need to report and avoid before getting into a loan agreement with the lender.
Merchant Advisors
Merchant Advisors