So, you are looking to raise capital for your new startup or for your growing business. I bet you have read the headlines or seen the ads:
Stop applying for bank loans, we can get you $250K fast.
We provide unsecured business loans even for those with bad credit.
We can get you a business loan with no assets and with major credit issues.
But, I bet you didn’t see or read the fine print – the fine print that states how much you have to pay upfront or that your upfront payment does not guarantee results – any results at all – including a phone call after they receive your upfront payment.
For the most part, most of these fly-by-night lenders or business loan brokers are just after your money, not in getting you the cash you need to start or grow your business. And, some will only point you in a direction or to a company that may provide loans but not to your company or to individuals in your situation.
The bottom line is that business loans for small businesses are hard to come by. Banks are not lending and even SBA loans have to go through banks first – but, as stated banks are not lending to small businesses.
For those few businesses that do qualify, all lenders (banks, private, public, etc) want to see two things:
First - your willingness to repay – if you won’t repay, they won’t make money or even get their loan proceeds back. And, if they think you won’t repay, they won’t give you a loan. They normally check your willingness to repay by your personal credit history – not some bogus business credit history that you paid for. And, they don’t take excuses – even those that seem reasonable to you.
Second – your ability to repay the loan via cash flow. You and your business have to show that you can repay the loan by making monthly payments of principal and interest. This does not mean cash flow after you get the loan but cash flow prior, usually in the form of three plus years of profitable business operations. Cash flow can come from either overall business revenue, personal ongoing income resources or the conversion of financial assets like accounts receivables, purchase orders or credit card receipts.
Thus, if your business does not have or cannot meet these two major items, then no lender - and that means NO lender - will provide your business with the capital it needs. And, if some individual or business says they can get around these lender required items, you better be reaching for the delete button and not your wallet.
On the other hand, if your business does meet these requirements, it still does not guarantee that you are dealing with a reputable lender or broker. What is does mean is that you just might be an easier mark as your overall guard might be down, as busy as you are.
So, how can you protect yourself from unscrupulous lenders or brokers?
Here are 6 simply must dos to ensure that you and your small business are not getting ripped off:
1) As stated, if you don’t meet the minimum lender’s requirement (willingness and ability to repay) then you won’t get a business loan, no matter what someone else is trying to convince you of.
2) Beware of upfront fees. If you are being asked to provide some money upfront (any money at all) before you are approved, beware. This should be a great big red flag.
Most true business loan brokers or similar individuals only get paid when your company receives money. Even the big players like investment banks only get paid after the fact. However, some brokers or lenders will ask for a small payment. This is primarily to make some people self-select. If they can’t pay or won’t pay, then they are not worth the broker’s or lender’s time. In these cases, it might be OK to pay the fee, but only if you get a guarantee with it.
The guarantee should either require that those monies be applied to any fees after a loan is approved and funded or that they be returned if the lender or broker cannot fund your request. However, you should only pay that upfront fee when you are completely sure that the broker or lender is legitimate (see the next few ways to avoid being ripped off below).
3) Do your homework. Sounds simple enough, but you would be surprised at how many people (even seasoned business owners) fall for a sales pitch and never look into the company or claims being offered. They actually count on you not doing your homework and have designed their offers to be so good that they blind the potential victim.
You have to know who you are dealing with before you commit any time or money in your capital raising efforts, as getting that loan or being ripped off might just be the difference between success and failure of your entire business and your personal life.
Always start with your social network, be it online or off. Talk to those that have already worked with the product or company you want to deal with, and only talk with those you know and trust. Then, follow up with other research methods, those that try to take some of the human element out of the data – like:
- Better Business Bureau – your local bureau, the bureau where the company or business you are dealing with operates and the national bureau.
- Chamber of Commerce – your local chamber and theirs.
- Google Search. While you should not believe everything you read on the web, a simple online search can uncover a lot of information about the company or people you are working with. Just remember to take most of that information (the good and the bad) with a gain of salt. But, if the information seems valid enough, it just might make you dig a little deeper or be a little more cautious – all to your benefit.
- Federal Trade Commission, State Consumer Affairs Office and State and County District Attorney’s Offices.
A little time spent now can save you a lot of money, headache and even save your business in the long-run.
4) Read everything - twice. Even legitimate companies hide things they don’t want you to know in the fine print. But, the opposite is true as well. If the company does not have any fine print, that also might be a red flag. Just read and understand before you sign. If you don’t understand then find someone that will explain it in plain English to you.
5) Raise your knowledge. If you don’t have a ton of knowledge in the world of business financing, get some. Study the different means of financing and their specific uses and educate yourself. Then, when someone is actually trying to pull the wool over your eyes, you will know right away and can quickly debate them back, on the spot. Far too many people get ripped off first then go out and try to educate themselves so that it won’t happen again. I suggest you do the opposite and educate yourself first.
Know how lenders underwrite business loans and why. Know what types of loans there are (like working capital loans, equipment loans, inventory loans, etc.), what they are use for and how they are funded. And, know what specific loans are designed for your specific needs. Not all loans are right for all business situations.
6) Lastly, use your gut. If you have any doubts – any doubts at all – that might just be your subconscious or higher power or intuition telling you something – something that your conscience mind or eyes might be missing.
Try to understand your gut feelings and not get caught up in the hype. If you can’t shake a bad gut feeling, then maybe it is time to look for another lender or at another, better avenue for financing. If you remember nothing else, if it sounds too good to be true, it usually is!
There are a lot of organizations (government and private) that are trying to stomp out those that are below board and that are ripping off unsuspecting business owners. However, it seems that for every one they manage to get, ten plus more crop up to fill that space left behind.
Just know that there will always be people and companies that will try to take advantage of you – either your lack of knowledge on a subject like business financing, your busy schedule or your simple desire to find the good in all. Regardless, if you don’t want to be ripped off when raising business capital, then that responsibility and effort rests on your shoulders and your shoulders alone.