Loan Schemes Snare Small Businesses in Record Numbers

Advance-fee loan schemes, in which self-described loan brokers demand upfront payments for loans that never materialize, have intensified since the financial crisis, as banks tightened lending standards, making it more difficult for small businesses to obtain financing, reported The Wall Street Journal.

In 2013, entrepreneurs and consumers filed with the Federal Trade Commission (FTC) a record 53,833 complaints about advance-fee loans and credit arrangers, up from 43,070 in 2012 and 44,504 in 2011, according to the government agency. Most of the complaints related to loans that never arrived, despite the payment of upfront fees.

The FTC said its year-by-year count increased partly because it expanded the number of external civil and criminal law-enforcement agencies from which it collects complaints.

Entrepreneurs tend to get duped by advance-fee scams because they are confident in their ideas and can overlook some of the red flags that should scare them off. Some small-business owners are targeted via email, while others become victims when they look online for lenders after being turned down for conventional financing. Businesses with $1 million to $50 million in revenue are the most common targets, and the vast majority of people who pay the advance fees to unregistered entities do not receive a loan.

“It was a costly lesson,” said one victim. “There’s no need to pay upfront for a loan.”