Are Small Business Lenders a Scam?
It really depends on the specific company. Here at the Scam Lender Investigator, we investigate and review banks and lenders, so that you will know which government agency is responsible for regulating them. Although some lenders are are not regulated and behave more like the mafia, there are many lenders who are legitimate financial institutions.
Most states require lenders to have a license to lend money in their state. Many times you will notice a broker is licensed to lend in 10 states but not all 50 states. Business owners should ask to see a copy of the lenders license and check on the state regulators website to see that the license is still valid.
States also have rules regarding the maximum interest rate a lender can charge.
How Does A Lender Scam Work?
The term Predatory Lending was used a lot during the sub-prime crisis in 2008, however it is occurs a lot with small business loans. Predatory lending means that the lender is using deceptive, or fraudulent practices when lending money to a business. The business is pushed to take a loan they cannot afford and are charged high fees and interest rates.
The biggest scam in the lending industry is unlicensed brokers who ask for non refundable application fees. We have heard of a case of a lender promising a business mortgage at 110% loan to value. The “lender” asked the small business for a $10,000 non refundable application fee. When a lender is asking the borrower for an upfront fee, that should raise a red flag. This usually means the lender does not have the ability to fund the loan and is solely looking for a way to get paid.
Another thing borrowers need to be aware of is the fine print. The are so many variables of a loan and a lawyer should always be consulted to review the loan documents with the borrower. Lenders usually give borrowers a “term sheet” which outlines the big numbers. Loan amount, loan term, interest rate, penalty, fees.
There is nothing wrong with a small business borrowing money at 25% interest. The person or company lending the money is taking a big risk and deserves to be paid back with interest. There is a problem when the small business owner unintentionally signs over their entire business.
Which Lender is Best For Small Business Loans?
There are many lenders who work with small businesses. Small businesses should look for lenders who have experience lending in their specific industry. Industry associations can be helpful in finding these lenders.
The reason to use an industry specific lender is because they understand your business and will not waste your time with false promises.
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