Fraudsters Prey on Small Firms Looking for Loans

Small businesses looking for funding during these tight economic times are finding themselves the unwitting victims of fraud.

More small firms are turning to the Internet to find loans and that's been a problem, said Edward Johnson, president and CEO of the Washington chapter of the Better Business Bureau.

"This is the tip of the iceberg," he said. "We're seeing an increase in the amount of fraudulent activities due to the current U.S. economy and credit crunch."

The fraudsters have been setting up professional-looking Web sites to attract loan candidates, only to ask them for upfront fees to process the loan or for other reasons.

"The big problem is that most consumers and businesses don't understand that it's against the law for a lender to charge a fee in advance of actually providing the loan," Johnson said. The Federal Trade Commission's telemarketing sales rule says if someone guarantees or suggests that they can obtain or arrange a loan for you, they can't ask you to pay for their service until you receive the loan or credit.

The scammers are asking for fees ranging from $1,000 to several thousand dollars, said Johnson. In many cases, the alleged lender simply vanishes. "They are there for a short period of time, take in a handful of advance fees and then the Web sites go down."

Some of the recent loan and grant offers that the BBB has identified as taking advantage of small business owners include Mediations, which is also doing business as Innovations Northeast. It is charging up-front fees for construction loans. BBB's Connecticut office said business owners paid fees as high as $26,000 and were required to pay by cashier's check or wire transfer. Complaints to the BBB about this firm show losses totaling more than $110,000.

The National Small Business Alliance was fingered for fraud by the BBB serving Los Angeles, Orange, Riverside and San Bernardino counties in California. Most recently, this alliance was doing business online here. Complainants said they were notified by phone or e-mail that they were pre-approved for a credit line of $8,000 for a one-time membership fee of up to $149. Capital Funding Programs, purportedly out of Champlain, N.Y., also has delivered phony promises. It told small business owners that it would help them bring in thousands of dollars in government grants. Since September 2007, the BBB serving upstate New York has received 34 complaints from 23 states about Capital Funding.

The BBB offers these tips for preventing fraud:

*Beware of advertisements for "advance fee" or "guaranteed" consumer and small business loans. They are against the law.

*Do not do business with a lender that asks for a large sum of money up front. It's illegal to do so.

*Keep in mind that legitimate lenders never guarantee a loan or credit card before you apply.

*If you're applying for a real estate loan, it is common practice to be asked to pay for a credit report or appraisal, but legitimate lenders will not ask you to pay for processing your application.

*A potential loan recipient should never wire money to a lender and never send certified checks or cash via courier to a lender.

*If you do not have a loan offer confirmed in writing and you're asked to pay, hang up the phone or ignore the e-mail.

*Never provide banking account numbers or any type of personal information to a lender you are not familiar with. BBB has listed on its Web site the lenders that have been linked to complaints. You can also file a complaint on the site.

By Sharon McLoone |  April 22, 2008; 10:15 AM ET
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Please email us to report offensive comments.

The web address for the Better Business Bureau is incorrect.

The correct address is:

Posted by: Baccuss | April 22, 2008 10:07 PM

The web address for the Better Business Bureau is incorrect.

The correct address is:

Posted by: Baccuss | April 22, 2008 10:08 PM

See how easy a mistake it is to make :)

Posted by: Baccuss | April 22, 2008 10:12 PM

Thanks for the heads up. Link to BBB site has been fixed.

Posted by: | April 23, 2008 11:52 AM

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