Most federal government loan programs established to address the economic impact of COVID-19 — such as the Paycheck Protection Program — are no longer accepting new applications. However, some businesses are still struggling financially and need access to capital.
Unscrupulous lenders have popped up to fill the void. Often, they try to lock borrowers into loans with punitive terms and conditions and nonrefundable upfront fees. To entice potential customers, they offer quick closing, sometimes in as little as 24 to 36 hours after receiving an application. They also advertise their willingness to skip essential due diligence, such as performing credit checks and interviewing applicants.
Even if your business needs funds fast, you have to be careful where you look for a loan. Here are a few tips to help you avoid predatory lenders.
The wrong loan — whether it features exorbitant rates or "falls through" after you pay a high loan application fee — can actually be fatal to your business. So research potential lenders thoroughly.
The best sources for referrals and introductions often are professional advisors, such as your CPA or attorney, or other business owners in your community. And if you haven't already, ask about a loan from the bank where your business holds deposit accounts. Every bank has its own underwriting guidelines, but you're more likely to hear "yes" and get a decent rate and terms if you're a long-time customer with a good track record.
Unsolicited loan offers via phone or email should be viewed skeptically. In fact, many of the people behind them aren't lenders but identity thieves hoping to trick you into giving them personal and financial information. Also be careful vetting lenders online. Keep in mind that some business rating sites allow companies to pay for endorsements or request the removal of negative reviews. Review multiple rating sites to get a broader view of a lender's business practices.
Even if you do your research, you still may encounter a predatory lender. This is particularly true if your company's history is checkered or you lack sufficient collateral. Sketchy lenders know that when some small business owners are desperate, they're willing to believe anything — even an offer no legitimate lender would make.
One red flag to watch for is an upfront loan application fee. Some companies masquerading as lenders don't actually make money from issuing loans, but by charging fees for loans they never intend to make. A "lender" may claim you'll receive a refund of your application fee if you get the loan. But of course, that rarely happens.
Borrowers have been known to pay loan application fees with a credit card, believing they can dispute the charge should a loan fail to materialize. That approach may work in certain situations. However, sophisticated fraudsters can dissolve their businesses once the volume of disputes becomes significant and disappear.
Although it's much harder for smaller companies to get loans from traditional lenders, don't give up before you try. Contact big-name lenders, midsized institutions and community banks to assess their interest. Even if a bank turns you down, the loan officer may be willing to explain why you didn't qualify and provide tips for strengthening your application.
Broadcasting your intention to borrow might also attract interest from potential investors. Before you change course and agree to equity financing, talk to your CPA about the potential financial ramifications for your business. Don't get too cozy with investors until you conduct background checks and meet face-to-face to discuss their motivations, management approach and understanding of your industry. Have your attorney review any legal paperwork before you sign it.
When you need capital to keep your business alive, any source of funds can look appealing. However, this is a bad time to drop your guard. Shop around and be sure to read every loan document carefully — especially where they discuss terms and conditions, and remedies should you default.
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