Small business owners are increasingly being victimized by advance-fee loan schemes.
In the scam, a loan broker — or at least, conmen calling themselves loan brokers — collects high fees from small business owners eager for loans. The scammers then disappear and the loans never materialize.
The scam has been around for years, but has proliferated in the wake of the financial crisis as loans to small businesses dried up due to tough lending standards,
The Wall Street Journal reports.
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The Federal Trade Commission received 53,833 complaints about advance-fee loans and credit arrangers in 2013, an increase from 43,070 in 2012, according to The Journal.
While consumers are also frequently targeted, entrepreneurs tend to miss red flags that should give them pause because they are confident their business will succeed.
The Journal profiled Tisto Chapman, a gym owner in Burbank, Calif., who paid Richard Saddler, a St. Louis broker, $12,500 to arrange a loan in order to upgrade his facility and refinance debt. Chapman never got the loan or his money back. Saddler pleaded guilty to wire fraud charges.
The FTC recommends being leery of lenders who are not interested in credit histories. Their ads often say: "Bad credit? No problem" or "We don't care about your past. You deserve a loan."
Other red flags include fees that are not disclosed clearly or prominently, loans offered by phone, lenders with names resembling well-known lenders, lenders not registered in your state and lenders who ask you to wire money or pay an individual.
West Virginia Attorney General Patrick Morrisey recently warned people in his state about an advance-fee loan scam in which a company offers loans in return for an upfront processing payment using a prepaid debit card. Consumers were being contacted by phone and email and directed to a fake website accepting applications and payments.
"Unfortunately, scammers are doing everything they can to look like a legitimate business only to steal consumers' money," Morrisey states in a press release.
Consumers should be wary any time a loan provider or company demands an upfront payment for service, especially using money order, prepaid debit card or cash, Morrisey notes. He also urges consumers to do their homework on any company with whom they plan to do business.
"If an offer seems too good to be true, it probably is," Morrisey states.
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