How to Avoid Common Business Loan Scams
Because there are so many scammers online, financial education is needed to avoid them. Understanding how to spot business loan red flags is the best way to prevent loss.
In this blog post, we’ll share our top 10 tips for avoiding small business loan scams. By the end of this post, you should be able to identify common warning signs that could mean a business loan scam is looming.
How to Avoid Business Loan Scams:
1. Be Wary of Scammers Pretending to Be a Trusted Source
Imitating a trusted authority figure, like a soldier or a police officer, is an age-old tactic of a scammer. Modern business loan scammers often pretend to be from the Social Security Administration or the IRS. Alternatively, they may even make up an official-sounding name or pretend to work for a company you know. Don’t be fooled by these tactics; and if you’re not sure, seek verification from a trusted source.
Next, conduct an online search with the details of the call or email you received. Chances are, it’s a known scam and that’ll be clear within the first few search results.
2. If You’re Unsure, Take Your Time
Scammers often try to pressure you into acting immediately. Their goal is to force you into a bad decision without giving you time to think. Even if you’re in a cash flow crunch, take your time and end your first conversation without making any firm commitments.
This way, you have time to do your research or solicit advice. Even if it’s not a scam, there’s no harm in taking a day or two, talking to a trusted colleague, and/or looking for a second opinion before making a decision that might cost you.
3. Don’t Share Personal or Financial Information
Real organizations won’t randomly ask you to provide personal information over the phone, email or text. If a company you think is real asks for your Social Security number, credit card, or bank account numbers, don’t do so digitally. Contact them using their website or find their publicly listed phone number. Email and text are not secure enough for you to exchange personal information.
4. If It Seems Too Good to Be True, It Probably is
A good rule of thumb to avoid business loan scams: if it seems too good to be true, it probably is. For example, if a lender is promising you free cash or an incredibly low interest rate, don’t rush into it. Do more research on the loan officer and look them up on the Better Business Bureau.
5. Research Prospective Lenders
Part of your due diligence on any prospective lenders should be a thorough online search. First, we suggest typing your lender’s name plus the word “scam” into a search engine. If someone’s been scammed by this lender in the past, this search should help you find out more information.
6. Don’t Pay Money Upfront
Anytime a lender asks you to pay money before your application is approved, you can be sure it’s a scam. Although application fees are normal, you don’t have to pay them if you aren’t approved. Never pay money for the opportunity of applying for a loan.
7. Ask Advisors for Advice
If you’re uncertain about a loan provider and you think it may be a scam, reach out to your network.
If you need additional assistance, contact a reputable business organization like SCORE or the Small Business Administration (SBA). Both organizations offer free workshops that teach small business owners how to avoid scams.
8. Don’t Click on Links from Unknown Sources
Even when an email or text message looks official, verify the sender’s identity.
For example, let’s say you receive an email from someone using the SBA logo. In the email, they say that they can provide you with a Paycheck Protection Program (PPP) or Economic Injury Disaster Loan. However, they need more information from you.
Before you respond, remember that it this could be a phishing attempt. Instead of responding, check that the sender’s email ends in @sba.gov.
To limit the damage of phishing attempts like the example above, we suggest taking the following security measures:
- Regularly updating your software
- Using multi-factor authentication
- Investing in security software
9. Verify SBA Lenders
As mentioned above, business loan scammers often pose as official organizations or government agencies, like the SBA, to victimize unsuspecting entrepreneurs.
Fortunately, if you’re seeking an SBA loan, you can verify whether a company is a verified SBA lender using this SBA Lender Search tool.
10. Look Out for Credit Repair Scams
Business loan scammers know how important your credit is for the success of your business. Due to this, they often promise huge improvements to your personal credit score that come with their loan program.
Don’t be fooled; even legitimate efforts to repair your credit score take time and continued effort. There’s no quick fix, and there’s certainly no loan that’s going to dramatically improve your credit score.
Conclusion: Be Aware of All Potential Financial Scams
The unfortunate reality is that small business loan scams aren’t the only potential scams that you need to look out for.
Scammers exist in many shapes and sizes and will use a variety of tactics to steal your information and money and ruin your business. For more information on a wider range of current and ongoing scams, read through the following resources:
- How To Recognize and Avoid Phishing Scams | FTC Consumer Information
- BBB Scam Alert: COVID-19 Relief Scams Target Small Business Owners
- Protect Yourself from Scams and Fraud | SBA
Editor’s Note: This post was updated for accuracy and comprehensiveness in December 2021.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.