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For newly minted entrepreneurs and struggling small business owners, obtaining a business loan can be tough—especially if you don’t have the time, credit history or experience to go the traditional lending route.
“Banks generally want to lend, but they have regulators looking over their shoulders. It’s like a hammer hanging over their heads if they make bad loans—so a lot of the lending they do is to folks that may not need the money as much as other folks,” says Craig Isom, director of the Business Resource Center/Small Business Development Center in Cedar City.
If you are desperate for the money, you aren’t likely to get it. So what is an entrepreneur or small business owner to do?
The void at the bottom of the lending food chain has created a market for loan brokers and loan agents—businesses or individuals that often offer quick and easy help in obtaining business loans. They are popping up everywhere, especially online. “Bad credit? No problem.” “Same day approval.” “Funding in as little as one day.” So go the online promises. Some loan brokers offer to line you up with potential lenders. Others promise to create a killer loan package for you. Some might do both.
But are these loan brokers or loan agents shady folks who are not to be trusted? Or are they credible business launchers? The answer isn’t always clear. And since the Utah Department of Financial Institutions doesn’t regulate them, you may not find out until it’s too late. How can you know if a loan broker or loan agent is legit? What are the red flags?
Take the Money and Run
Daryl Rude, supervisor of industrial banks for the Utah Department of Financial Institutions, has a relative in Montana who was desperate for a loan to save her business. She mailed a $300 finder’s fee to an online loan broker offering assistance. The loan never came and the money vanished, as did the loan broker.
“Sadly, there are businesses out there that never intend to make a loan to anyone. They simply take the fee and move on,” says Rude. “For every legitimate loan broker there is probably one that is not.”
Small Business Administration (SBA) loan fraud is another area of trouble from unscrupulous loan brokers and agents. According to an information notice provided by the SBA’s Utah District Office, a decade of investigations by the OIG has identified fraud schemes perpetrated by loan agents totaling more than $300 million.
Certainly, not every loan broker or agent specializing in SBA loans is corrupt. As the information notice says, “Loan agents can provide a useful function in bringing borrowers and lenders together and facilitating loan transactions.” Nonetheless, the agency has stepped up its enforcement programs to deter fraudulent loan agent activity, and borrowers should beware.
It’s also not fair to suggest that every loan broker or agent that charges an upfront fee is a fraud, says Brock Blake, cofounder and CEO of Lendio, a Utah-based company that uses a proprietary online system to match small business borrowers with the preferences of hundreds of lenders (free of charge—the lenders typically pay Lendio).
“Some loan brokerage companies I know are very reputable. They do a very good job. They may charge a couple hundred dollars (or whatever the amount is) upfront, but that’s to ensure the borrower is interested and committed to getting a loan,” he says. “They often use the upfront fee as more of a hurdle to filter out applicants that aren’t really serious about getting a loan.”
Blake concedes, however, that some unscrupulous companies do charge upfront fees without offering anything to show for it—the kind of scammers who will take your money and run. Other companies or individuals want to trick you into divulging your personal and financial information so they can commit identity theft.
Throwing Good Money after Bad
Do you really need to hire someone to help you get a business loan, or are there enough free resources out there—like Business Resource Centers (BRCs) and Small Business Development Centers (SBDCs)—to get the job done yourself?
Isom says the loan application process can indeed be complicated. “Bankers speak a different language and see the world differently. Loan officers generally take a clinical approach to loan applications. That’s why borrowers that aren’t savvy to the banking world should seek help.”
Blake says the benefit of a company like Lendio is that an entrepreneur or small business can create a free online loan profile, which is then matched up to the requirements of lenders across the country. “It minimizes what can be a complicated loan process and can save the borrower a lot of effort, rather than having to shop from bank to bank to bank to find the loan they are looking for,” he says.