Business loans can be vital to growing your business. But you want to be careful when shopping for a business loan, as there are plenty of scammers who are out to take advantage of business owners they think might be desperate. As a result, it’s important to know how to check if a loan company is legitimate. Here are some tips to help you spot potential red flags.
Common Types of Loan Scams
There are two common types of loan scams you’ll want to watch out for. (Both personal loan scams and business loan scams often operate in a similar fashion.) They are:
- Advance Fee Loan Scams. Here, loan scammers will promise a loan but will require money upfront to either pay for “insurance” or to make a few payments up front to “demonstrate good faith,” They will typically require these payments to be made with a gift card or prepaid card— either by asking you to mail them the card, or more commonly to read the information from the card to them over the phone.
- Phishing scams. In these scams, someone tries to get you to reveal sensitive information in order to provide you a loan. The loan never materializes but you or your business becomes a victim of identity theft.
Either can be devastating financially. Running a business is stressful enough without falling for a loan scam!
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What Are the Warning Signs of a Business Loan Scam?
There are warning signs that you may be dealing with a loan scammer rather than a reputable lender:
Requires an upfront payment. Scammers may insist you send them money before you get the loan funds. In some cases there may be legitimate upfront fees for a loan (such as an appraisal for a commercial mortgage) but in most cases these fees are bogus attempts to steal your money. The scammer will usually require you pay by a method that’s difficult to trace and impossible to refund, such as wire transfers or prepaid cards.
Requests personal information but is not secure. This one is tricky because loan applications with legitimate loan companies often will require you to provide a Social Security Number (SSN) for a personal credit check and/or an Employer Identification Number (EIN) or Taxpayer Identification Number (TIN) for a business credit check.(If you are monitoring your credit reports, you’ll see an inquiry from the company that checked your credit on one of your credit reports.)
Your bank account information may be required either to verify revenues or to facilitate ACH payments. It is essential that when you are asked to provide personal information make sure you are dealing with a reputable company and using a secure website. (See tips below.)
Loan approval regardless of credit. Scammers will often say you are approved for a loan even though you have a bad credit score and don’t meet normal qualifications. Most lenders will have some basic creditworthiness requirements, whether that’s based on personal and/or business credit. While there are some types of small business financing available to business owners with poor credit, there is often a higher cost associated with these options.
Excellent loan terms for a new or struggling business. Most business loans require a combination of strong revenues, at least 1-2 years in business and/or good credit. If you have none of these qualifications it is unlikely you will qualify for most types of small business financing. If someone calls you and promises financing at very low interest rates regardless of your qualifications, you may be dealing with a scammer.
How to Check If a Loan Company Is Legitimate
There are several ways to check if a loan company is legitimate. First, check out the loan company on the Better Business Bureau (BBB) website. Do a quick online search and look up online reviews from independent companies like Trustpilot, if possible.
Finally, check with your state’s attorney general to find out if there are complaints, or if the company is not registered as required.
Before you apply with a lender, think about these steps to make sure you don’t get caught up in a scam.
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1. Check for an online presence
Before you do business with an online lender, do an internet search for the company name. (Tip: Try the “news” tab in google to see if the company has been mentioned in news articles.)
But don’t assume a professional-looking website alone means it is legitimate. Also if the company reached out to you (versus you reaching out to them), you could be talking to a scammer who is impersonating a legitimate company.
You can also look up the domain name registration to see when a website was registered. This may help you spot a site that is brand new and may have been created for unscrupulous purposes.
Loan brokers and loan companies must be registered in certain states. If they are, they will list that license information on their website. Look for it, and when in doubt, verify it.
Most importantly, before you enter any information on an online lender’s website, check for a padlock in the URL to make sure the site is secure. You can then click on the padlock to see if the security certificate is up to date.
Pro tip: Never enter personal information or sensitive business information on a website that is not secure!
2. Look for signs of phishing.
If you receive information by email watch out for misspelled words, either in the email or in the email address. Hover over the email address to see if it’s as represented. If the email address is generic (like @gmail.com) you are very likely dealing with a scammer.
3. Research the business location
Look under the website contact information for a physical address, then look that address up on google maps. You may be surprised how many of these searches result in a residential home address or a business that has nothing to do with lending! If the only address is a P.O Box, make sure you do additional research to verify the company is legitimate. You can also do a reverse search on the phone number calling you.
4. Check with the Better Business Bureau
Even if the loan company has an online presence, that doesn’t necessarily mean that its operations aren’t predatory. Check the Better Business Bureau website to learn more about whether the lender is worth working with. You’ll typically see a letter grade from A+ to F, along with reasons for the grade.
In some cases, you’ll also be able to read customer reviews, which can give you a better idea of what to expect. If you find that the lender wouldn’t be a good fit, you can also use the website to find one that might be a better one.
5. Do a gut check
Lenders want your business, but they shouldn’t be desperate for it. If you feel like the person you’re dealing with is overly aggressive or manipulative, it might be a sign that they’re trying to fluster you and make you feel like you need to make a decision before you get all the facts.
If you feel uncomfortable about the process at any time, take a step back and consider why you feel that way and whether you should continue.
It’s very hard when you’re desperate for a loan to pass up what may feel like your only opportunity to get one. But if you’re feeling uncomfortable, it may be because you know something isn’t right. Take time to do some research, especially if you risk losing money in the transaction.
6. Check with regulators
If most everything checks out, but you want to be entirely sure, contact your state’s attorney general office or the state attorney general’s office in the state where the business is located. The Consumer Financial Protection Bureau may be able to help too. Lenders and loan brokers are often required by law to register with state agencies before they can do business there.
Who Is at Risk of a Loan Scam?
The more desperate you are to get financing quickly, the more you will be a target for predatory lenders or scams. You’ll need to be especially careful if you are looking for:
- A debt consolidation loan because you are falling behind,
- A bad credit loan because your credit history is not good,
- A large loan amount with minimal qualifications, or
- A business loan even though you’ve been turned down by multiple lenders.
That doesn’t mean you can’t find a loan but you must be very careful not to get taken in by a scam.
Warning: Watch out for loan offers that are too good to be true!
How Do I Know If a Loan Company Is Scamming Me?
In addition to taking the above steps, there are some other small things to think about as you learn how to check if a loan company is legitimate. Here are some questions and answers to help:
Do Loan Companies Ask for Money up Front?
Some lenders charge what’s called an origination fee to process your loan. However, this fee is typically deducted from your loan disbursem*nt. Legitimate lenders don’t ask you to pay the fee directly before you can get access to your money.
Watch out for requests to pay an “insurance” fee or to make several payments upfront in advance of getting the loan. These are typical requests from scammers. They want you to pay them before you get your loan.
Do Loan Companies Ask for Bank Login Info?
In some cases, a lender might ask for your bank account number to know where to send the loan funds after your application has been approved. Some online lenders may ask you to connect a business bank account to analyze and verify your revenues to see whether you qualify for an online loan. In those cases, make sure you are dealing with a legitimate lender and a secure website.
Watch out for scammers looking to get access to your account to make a withdrawal or transfer to their own account.
How Do I Know if a Financial Institution Is Legitimate?
In the US, national banks and federal savings associations are chartered and regulated by the Office of the Comptroller of the Currency. You’ll find a list here.
Stated chartered financial institutions will be registered through state licensing agencies. For example, the Michigan Department of Insurance and Financial Institutions’ Office of Banking oversees the safety and soundness of Michigan’s state-chartered banks, savings banks and Business and Industrial Development Companies (BIDCOs).
Legitimate financial institutions and business credit card issuers won’t call non-customers, offer a loan and then request personal information. If you get a call from someone stating they are from a lender or credit card company, be careful, especially if you aren’t a customer. Tell whomever is calling that you’ll call the financial institution using contact information provided on their website.
How to Find Fake Loan Apps
Fake loan apps are designed to gather personal information and scam individuals looking for loans. When discovered, these apps may be taken from app stores, but the scammers may try to create a new version. That means you must always be very careful about apps you download the permissions you give them. Here are a couple of sources for lists of fake loan apps:
But just because a suspicious loan app doesn’t appear on one of these lists, that doesn’t mean it’s legitimate. Be careful.
How Do I Spot Personal Loan Fraud?
Some personal lenders will allow you to use personal loan funds to start or fund a business, but there are also plenty of scams to watch out for here. In general, you can use the same steps as you would with a business lender to find out if you are presented with a legitimate personal loan offer.
Are Bad Credit Loans Legitimate?
There are several legitimate business lenders who specialize in working with borrowers with bad credit. In most cases, those lenders will base their decision on your verifiable business revenues and will require at least a year in business. Take your time when comparing bad credit business lenders to make sure you not only avoid scams but also improve your chances of getting favorable terms on your loan.
What Do Lenders Require to Get a Business Loan?
To get a “real loan” from a small business lender or financing company, your business will likely need to meet at least two of the following qualifications.
- Creditworthiness: Good to excellent personal credit scores and/or business credit scores often required, though not always.
- Time in business: 2+ years in business is preferred by most lenders. Although some lenders are willing to work with businesses that have been around for six months or more.
- Revenue: Lenders often have minimum income requirements and will require verification.
- Type of business: Lenders commonly have lists of industries they will or won’t lend into.
If you don’t meet some of those requirements, you or your business will likely need to meet other qualifications. In other words, a business with bad credit, few revenues and/or in an industry that is difficult to fund because it is considered risky, will likely have trouble getting funded. They could be vulnerable to scams.
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Where Can I Get a Business Loan If I Don’t Qualify?
If you are having trouble qualifying for a small business loan, there are legitimate resources that may be able to help:
SBA resource partners like SCORE or your Small Business Development Center provide free mentoring services to entrepreneurs.
Your accounting professional can help you evaluate your business cash flow and financial situation.
Nav can help you understand your credit, as well as how lenders view your qualifications for a loan.
Where Can I Report a Loan Scam?
The first place you should report loan scams to us local law enforcement. If they cannot help, try your state attorney general, the Consumer Financial Protection Bureau (CFPB) and/or the Federal Trade Commission (FTC).
The Bottom Line: Loan Scams
If you’re trying to get capital to grow your business, you need to know how to check if a loan company is legitimate. It can save you from losing money and, potentially, your business.
As you consider these tips and learn where to look to compare legitimate lenders, you’ll be able to get the help you need without being worried about getting taken advantage of.
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This article was originally written on April 3, 2019 and updated on January 10, 2024.
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