Borrowing trouble: business loan scams and how to avoid them.
"Banks generally want to lend, but they have regulators looking over their shoulders. It's like a hammer hanging over their heads if they make bad loans--so a lot of the lending they do is to folks that may not need the money as much as other folks," says Craig Isom, director of the Business Resource Center/Small Business Development Center in Cedar City.
If you are desperate for the money, you aren't likely to get it. So what is an entrepreneur or small business owner to do?
The void at the bottom of the lending food chain has created a market for loan brokers and loan agents--businesses or individuals that often offer quick and easy help in obtaining business loans. They are popping up everywhere, especially online. "Bad credit? No problem." "Same day approval" "Funding in as little as one day." So go the online promises. Some loan brokers offer to line you up with potential lenders. Others promise to create a killer loan package for you. Some might do both.
But are these loan brokers or loan agents shady folks who are not to be trusted? Or are they credible business launchers? The answer isn't always clear. And since the Utah Department of Financial Institutions doesn't regulate them, you may not find out until it's too late. How can you know if a loan broker or loan agent is legit? What are the red flags?
Take the Money and Run
Daryl Rude, supervisor of industrial banks for the Utah Department of Financial Institutions, has a relative in Montana who was desperate for a loan to save her business. She mailed a $300 finder's fee to an online loan broker offering assistance. The loan never came and the money vanished, as did the loan broker.
"Sadly, there are businesses out there that never intend to make a loan to anyone. They simply take the fee and move on," says Rude. "For every legitimate loan broker there is probably one that is not."
Small Business Administration (SBA) loan fraud is another area of trouble from unscrupulous loan brokers and agents. According to an information notice provided by the SBA's Utah District Office, a decade of investigations by the OIG has identified fraud schemes perpetrated by loan agents totaling more than $300 million.
Certainly, not every loan broker or agent specializing in SBA loans is corrupt. As the information notice says, "Loan agents can provide a useful function in bringing borrowers and lenders together and facilitating loan transactions." Nonetheless, the agency has stepped up its enforcement programs to deter fraudulent loan agent activity, and borrowers should beware.
It's also not fair to suggest that every loan broker or agent that charges an upfront fee is a fraud, says Brock Blake, cofounder and CEO of Lendio, a Utah-based company that uses a proprietary online system to match small business borrowers with the preferences of hundreds of lenders (free of charge--the lenders typically pay Lendio).
"Some loan brokerage companies I know are very reputable. They do a very good job. They may charge a couple hundred dollars (or whatever the amount is) upfront, but that's to ensure the borrower is interested and committed to getting a loan," he says. "They often use the upfront fee as more of a hurdle to filter out applicants that aren't really serious about getting a loan."
Blake concedes, however, that some unscrupulous companies do charge upfront fees without offering anything to show for it--the kind of scammers who will take your money and run. Other companies or individuals want to trick you into divulging your personal and financial information so they can commit identity theft.
Throwing Good Money after Bad
Do you really need to hire someone to help you get a business loan, or are there enough free resources out there--like Business Resource Centers (BRCs) and Small Business Development Centers (SBDCs)--to get the job done yourself?
Isom says the loan application process can indeed be complicated. "Bankers speak a different language and see the world differently. Loan officers generally take a clinical approach to loan applications. That's why borrowers that aren't savvy to the banking world should seek help."
Blake says the benefit of a company like Lendio is that an entrepreneur or small business can create a free online loan profile, which is then matched up to the requirements of lenders across the country. "It minimizes what can be a complicated loan process and can save the borrower a lot of effort, rather than having to shop from bank to bank to bank to find the loan they are looking for," he says.
On the other hand, he notes that some loan brokers get bad reputations, "because they try to put lipstick on the pig, so to speak, regarding the loan package, trying to get every loan funded so they will be paid on more transactions. Often, the lenders will look at loan brokers a little bit hesitantly, wondering if the loan package they are looking at is really the true story of the business owner."
Meanwhile, Isom says loan brokers that shop traditional lenders are just adding an additional layer of expense and that a BRC or SBDC is a better resource. "An SBDC can help assess the borrower's needs, help get the loan or business package ready and then help apply for the right loan. The SBDC will also help you tell your story and buy into your vision and passion," he says.
Getting help with the loan process is generally a smart move, whether that means help from a BRC, SBDC or company like Lendio. In all three cases, the services are generally free to the borrower. But according to Blake, 95 percent of small businesses get declined for the loans they shop locally. On the other hand, he says 85 percent of the business owners that come through Lendio get matched to at least one lender. Of that 85 percent, about 60 percent are approved for a loan.
When evaluating a loan broker or agent, you are looking for credibility, says Lendio CEO Brock Blake, which will add to your comfort level and help you decide whether or not you want to work with the company. How can you avoid becoming a victim? Look for these red flags:
1 Paying for a promise. Blake says there are times when an upfront fee is necessary, such as to pull your credit. But Isom says if the loan broker charges an upfront fee, "he has no skin in the game and no motivation to help you get your loan. He gets compensated, but you have no guarantee of the results."
Daryl Rude believes you should question the motives of anyone that charges an upfront fee. "And if you send $300 to a P.O. box, you are going to get what you get--nothing."
The safest bet is to work with loan brokers or agents that take a fee out of the back end of the loan. They are much more accountable and the deal is much less risky, according to Blake.
2 A loan guarantee. "Any guarantee by the company that you are going to get a loan would scare me to death," says Blake. "The loan broker has no control over whether or not you will get the loan. The lender is the one to make that decision."
Isom agrees: "Lending is not that straightforward. There are no guarantees and no magic grant money."
3 A vague explanation of what you are paying for. "You have to understand the deliverables and what you are getting for the money you are spending," Blake says. "Are you paying the broker to help you with a business plan and a financial model? In many cases that is totally legit, because that may be part of the service the company offers. Or are you paying for help to shop your loan application? There is a difference. You need to understand that relationship upfront. Otherwise, you may end up paying for a loan package when you thought the broker was going to shop your loan application for you."
4 Vague information about the online loan broker. When examining the services of a loan broker, ask yourself these questions:
* Does the website contain details about the company, its owner(s), its officers, its executive team, its track record?
* Has the company registered with the Better Business Bureau?
* Does the company have a good reputation? A quick Google search can help you find out. Are there any complaints or lawsuits pending?
* Is the company very public--meaning it is actively blogging and talking about its products, services and customer success stories? Or does the company only offer a generic page with basic information, such as a phone number?
* Where are the disclosures? Isom says any legitimate lender in business to make loans will have disclosures that explain the products and services offered and the fee structure.
5 Low rates and instant approvals. Remember that old adage, "If it sounds too good to be true it probably is." counsels Isom. If you don't qualify for a loan from a local lender, should you trust a pie-in-the-sky deal from an online loan broker?
By Gaylen Webb | Illustration by Mark Jarman
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|Date:||Jul 1, 2013|
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