You’ve probably heard the song of the lending shark: “Don’t worry! You have a great business here. It’s only a matter of time before you hit it big. Don’t give up now! We can lend you what you need to keep going.”
Doesn’t every business owner in financial trouble want to believe that siren song? Watch out! Your new friend might easily swoop in and take your business out from under you. Here are some of the ways to tell whether that loan is legit or if you're at risk of being ripped off.
Upfront Fees
When it comes to business loans, they work a bit differently than consumer loans. These are three legitimate upfront fees that may be involved.
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A borrower origination fee: This pays for processing a new loan.
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Underwriting fees: These go to underwriters who review and verify the financial information you’ve provided.
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Closing costs: These service the loan for fees such as an appraisal, loan-packaging fee or business valuation.
If a lender promises you a loan in exchange for a fee outside of these areas, you’re looking at trouble. That is the time to stand up, turn around and leave.
Not Worried About Financial Risk
Another red flag is a lender who knows you’re good for it, no matter what some accountant says. He is uninterested in even hearing your credit score. This lender's goal may not be to get you to pay back his loan but to sink you so thoroughly in debt that your business will become his.
Honest money lenders thoroughly look into potential customers and their projects in order to protect their own interests, promote positive experiences and interactions, and to create customer relationships that generate future business.
Willing to Lend More Than a Business Can Afford
You ask for $10,000 to pay suppliers so you can order parts to service your customers. The shady lender offers you $25,000 instead, not only for parts but building inventory and more marketing. This plan might sound like what you’re looking for, but it may just turn your molehill into an insurmountable mountain.
Business is difficult, risky, and can be immensely rewarding. The differences among failure, mediocrity, and eventual success lie in the wisdom you uses in financing your operation and how you protect your credit score. Making prudent lending choices is one of these wise choices.
In addition to finding a good money lender, another wise choice is having good insurance for your business. Check out our business insurance options and see which one best fits your needs.