From the March 2002 issue of Startups

You need money to start your business. But you don't want to be a member of the "It Happened to Me" club when it comes to loan scams. According to the Council of Better Business Bureaus, complaints about fraudulent "loan brokers," most operating out of Canada, surged in the weeks before the 2001 holiday season. These so-called brokers request an upfront processing fee, sometimes as much as $3,000, and when the fee is paid--well, kiss your $3,000 good-bye.

With the economy down and more people--business owners and consumers alike--seeking small business loans, it's not surprising that scams are on the rise. "[Loan scams] have been an ongoing problem for many years now, but these scam artists who perpetrate loan fraud get into high gear during periods of economic uncertainty," says Holly Cherico, vice president of communications for the Council of Better Business Bureaus in Arlington, Virginia. "People are [getting] laid off, and these [scam artists] take advantage of that."

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Your best defense is to check out the lender's background and reputation before you give out any personal information or send them any money. First off, anyone who guarantees you a loan without looking at your credit history or your business plan is not on the up and up. And if they ask you to overnight a "processing fee" upfront, hang up the phone immediately. "You will never see that money again," says Cherico. In fact, requesting overnight mail is a way for the scammers to avoid the U.S. Postal Service and its postal inspectors, who would put them out of business.

But stealing your money is only one part of the scam--many of these entities exist to steal your personal information as well--social security number, credit card number, bank account information--and this identity fraud can haunt your business as well as your personal credit rating for years. To protect yourself, insist that you get the loan application in writing. If they pressure you to make a decision right then and there, high-tail it in the other direction.

Still, don't give up on the idea of getting some money to start your business. "There are a lot of ways you can do some fairly cheap and quick research just to make sure you're not being sucked in by a shark," says Judith Lowitz Adler, a partner with Warner Norcross & Judd LLP, a law firm in Southfield, Michigan. Check out the lender with the Better Business Bureau or state attorney general's office to see if any complaints have been filed. Request financial statements of the lender, specifically assets and capital. And use local resources--the ever-helpful SBDCs, small-business clubs, networking and minority business groups--to get leads on trustworthy lenders.

Though people with bad credit will likely have a more difficult time getting attention from reputable lenders, some lenders might consider a high-interest loan for high-risk entrepreneurs, with a provision for lowering the rate when the business shows some positive cash flow and the ability to cover debt and so on--a cost savings as your business becomes more successful. Like everything else concerning your business, there are no shortcuts to getting a loan. And remember the old adage, if it sounds too good to be true, it is.