Top Financial Scams Targeting Small Business Owners

Small and home-based business owners in desperate need of financing are increasingly being targeted by a flood of scam artists hoping to capitalize on wide spread confusion and economic hardship. The Better Business Bureau recently released its list of the top 10 scams and rip-offs for 2009. Here are a few examples from that list directed at small business owners:

Stimulus/Government Grant Scams – Even before President Obama announced the stimulus plan in February, scammers had already set up schemes for misleading consumers and small business owners into thinking they could get a piece of the pie. Offers for worthless assistance and advice on how to get government grants bombarded consumers online, over the phone and via mail and e-mail.

Google Work from Home Scam – Countless Web sites cropped up in 2009 that claimed you could learn how to make money from home using Google or Twitter and offered a free trial of learning materials. The Web sites often included the Google or Twitter moniker and logo. As a result, many people who complained to BBB thought they were getting a job with Google or Twitter when in, fact, they were being lured into another misleading free-trial offer and were billed every month for the materials and other mystery charges that added up to hundreds of dollars.

Over-Payment Scams – Over-payment scams typically target small business owners, landlords or individuals with rooms to rent and sellers on classifieds or sites like Craigslist. Typically the scammer pretends to be a customer, possible renter or interested buyer, respectively. The victim receives a check for more than the amount requested. The scammers then ask the victim to deposit the check and wire the extra amount elsewhere, such as to a shipping company. Ultimately though, the check is fake and the victim is really wiring money back to the scammers.

Other common fraudulent financial schemes include:

The Advance Payment/Fee Scam- A person claiming to be a loan broker asks for an upfront processing fee that can go as high as a few thousand dollars. Upon payment of the fee the “loan broker” disappears and the loan never materializes.

The Identity Thief- In this case sensitive information, not money, is the target. Fraudulent brokers lure unsuspecting business owners in to applying for a loan by either promising easy approval or low interest rates. After filling out the application, the broker absconds typically with the applicant’s social security number, bank account information, and even credit card numbers.

Fake Equipment Loans/Lease Programs- Business owners receive a letter or a phone call stating that they have been pre-approved for either an equipment loan or equipment lease. They are encouraged to send in their first payments, yet they never receive the equipment.

In an upcoming post, I’ll outline some tips on how to protect yourself and your business from these fraudulent financiers.


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Does Obama Really Care About Small Businesses?

For numerous small business owners who are being heavily affected by the current economic turmoil, the road ahead remains tough. Though the Fed (with a lot of help from the media) has been all too happy to call an end to the U.S. recession, the statistics paint a grimmer picture: the rates of unemployment, home foreclosures, and bankruptcy filings are all soaring. This comes as the credit markets remain tight and the cost of health care continues to prohibitively climb.

With all the focus being heaped on government-sponsored economic stimulus, it would seem that the issue of small businesses should be front and center. After all, small businesses in the U.S. account for half of the GDP and over half of the nation’s employment. Shouldn’t the Administration in the White House be concentrating on easing the burden for the nation’s smaller companies?

So far real help has been slow in coming, and this raises an important question: Is President Obama really concerned about the plight of small businesses?

The answer, in my opinion… not enough.

Let’s look at the facts:

In a previous post, I pointed out that government money did not seem to be reaching the small businesses who needed it the most. But underlying this article was the fact that it was Senators John Kerry (D-Mass.) and Olympia Snowe (R-Maine) who worked to secure the 45% funding increase for the SBA’s core small business programs in the first place. Under the President’s plan, several small business loan programs were effectively reduced or nixed completely.

And then there is the recent annoucement that the Administration will ask Congress to raise the loan limit on the 7(a) lending program to $5 million; on the 504 program from $4 million to $5.5 million, and on the microloan program to $50,000.

This was a blatant nod to Republican Senator Snowe, whose support is crucial to the Administration in the area of health care reform- President Obama’s pet project. This seems more like political maneuvering rather than a serious commitment to helping small businesses.

In order to truly hasten an economic recovery, Obama may need to re-evaluate his interests and start showing small business owners and their employees that he cares.

10 Factors that Cause Small Business Lenders to Reject a Loan Request

Even as the economy shows subtle signs of a future recovery, many economic experts agree that it is far from over and that spells bad news for small businesses in search of financing. Lenders continue to be tight-fisted when it comes to extending credit, and this dearth of financing has dealt a tremendous blow to many small businesses in desperate need of funding as the recession drags along.

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In such an environment it is important to be aware of what lenders are looking at when they receive a loan request. The following are ten signs that will alert small business lenders to the idea that their may be a serious problem with the business and possibly cause them to reject a loan request. While many of these signs may seem obvious, others may not. So take note. If any of these situations apply to your business then be prepared to have an explanation available for the loan officer.

1. There is a significant drop in sales. Though many businesses (especially those involved in retail) are experiencing a decrease in sales traffic, a sudden drop in sales could be a sign that your business is out of touch with consumer demand or is losing its market share.

2. The business is unable to pay off bills on time. A sudden inability to cover expenses could be the result of lower sales due to the recession and an increase in the cost of materials and supplies; or it could be a sign of poor cash flow management

3. There is a sudden increase in personal expense write-offs. Though claiming personal expenses can be for legitimate reasons, a sudden or disproportional increase in personal expense write-offs can be a sign of fraudulent activity.

4. Insufficient funds are leaving the business. The owner may be trying to cut costs, preserve cash flow, or prepare for later expansion, but it can also be a signal that anticipated financial trouble looms ahead.

5. Critical equipment is being sold. Under-utilized or outdated equipment may be sold to increase cash flow. It could be the intention of the business owner to replace this equipment with newer technology. But lenders may see this as a desperate attempt to bring money into the business.

6. The business has a significant increase in debt. Though the increase in debt may be necessary to cover a temporary cash short fall, or it may be the prelude to an expansion, it can be a sign to the lender that the business is starting to flounder.

7. Cash reserves are plummeting. Like the situations above, this could be a sign that the business is headed for financial trouble.

8. The operating cycle is increasing. A business’ operating cycle is the average time between acquiring raw materials or inventory and receiving payment for the goods/services provided to customers. Business owners need to pay attention to their cash flow, inventory flow, payables and receivables. If the cycle has started increasing then be prepared to offer an explanation.

9. There has been a significant increase in legal fees. Perhaps a business owner needs the assistance of a qualified CPA or attorney to provide counsel on a range of issues, such as taxes, business structure, acquisitions, or intellectual property protection. But it could also mean that a lawsuit is brewing.

10. A change in ownership. A recent change in ownership can also put off lenders. They may want to know if the new owners have management experience.

In short, to secure the decreasing pool of small business financing, business owners will need to start thinking like a lender. By spotting potential problems before hand, you can increase your chances of getting approved for that loan.


SBA Lending: Small Businesses Still Waiting to be “Stimulated”

It all seemed so promising…

Last year, Senator John Kerry’s Small Business and Entrepreneurship Committee managed to not only save several small business loan programs that were effectively reduced or completely nixed under the President’s proposed 2009 budget, but they also managed to secure over $100 million in additional funding. This additional funding was supposed to cover “increased loan oversight and reduced fees, microloans, contracting assistance, Small Business Development Centers, Women’s Business Centers, veterans outreach programs, and technical assistance programs…”

Over the year that followed, the SBA has heavily promoted its flagship offerings to small businesses- namely the 7(a) and 504 lending programs. And recently, it caused a stir with its America’s Recovery Capital Program, or A.R.C. Under this program, previously profitable small businesses currently experiencing financial difficulty would be given the chance to catch up on their debt. The A.R.C. loans, which can go up to $35,000, carry no fees and no interest, and are to be used to pay down existing debt. What’s more, the borrowing company does not have to begin repaying the loan until a year after it receives the final installment.

It sounded great, and many small businesses owners across the nation no doubt breathed a sigh of relief expecting that help would come their way. But the help has been slow in coming. Even with all the money and high hopes, banks both big and small and other “preferred” SBA lenders have been reluctant to offer SBA- backed loans (or any loans for that matter) to small businesses (for example, read here and here).

Even though both the SBA and the media have reported that small business lending has increased in the last few months, it is too little, too late for many of the small businesses who need this funding the most.

All disappointment, frustration, (an even anger) aside, the reality is that most small businesses would do better to abandon hopes for a government life-preserver and instead consider alternative forms of financing, such as accounts receivables factoring and merchant cash advances or tapping into the resources of friends and family to stay afloat in these difficult times.




How to Build Your Business Credit Rating

Having a good business credit rating is a golden key that can help open the doors of financing- whether from the bank, vendors and suppliers, or potential investors. And with the current economic environment making it harder for small businesses to get the financing they need, this key is all the more vital to the success of a business.

Here are a few tips to help build up and maintain your business’ credit profile:

Tip #1: Separate your business credit profile from your personal credit. Many business owners are unaware of this option, especially if they are running a sole proprietorship, and they finance their businesses with their own credit and assets. This can be a costly mistake, since your personal credit profile will then directly effect your business credit, and visa versa.

Tip #2: Register your business with the major credit reporting agencies and monitor reporting. Banks, credit card companies, utility, and phone companies, as well as numerous other businesses will report billing and credit information regarding your business to the major credit reporting agencies: D&B, Experian, Equifax and TransUnion. With this information, the credit reporting agencies produce reports and credit scores. Keep in mind that any information on your business’ financial status, as well as any court cases and bankruptcies will also make their to these reports. Thus, it is important to monitor these reports regularly.

Tip #3: Make good cash flow management a priority. Make it a priority to pay your bills on time. Simple idea, right? It just may not be so simple to implement- especially if business has not been so great lately. In a previous article I included a few doable tips to improving your small business’ cash flow.

Tip #4: Seek out transactions that will improve your credit score. As I mentioned above, whether you realize it or not, chances are that your business is already generating data that can be accessed by a third party to determine your business’ credit-worthiness or financial stability. You might as well specifically seek out those arrangements that will build your business’ credit profile. You can find out which businesses report to the credit agencies and make it a point to do business with them and to keep your payments on time. The credit reporting agencies themselves also offer a number or credit-building services for a fee. 

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5 Tips for Preserving Your Business Line of Credit

Many small businesses rely on a bank-approved business line of credit as a convenient source of short-term financing. But preserving this credit-line is not always so easy. Most banks make a commitment for one year. At the close of the year the business’ financial statements, tax returns, and credit rating are reviewed. If the bank does not like what it sees, then it may not renew the credit-line, and you may be expected to pay the remaining balance in full.

Many business owners may not realize that the bank generally has the authority to “call” the full amount due immediately and without reason.

Suddenly losing a line of credit can be a devastating blow to a small business. Here are 5 tips that can help a business hold on to its credit line even when business performance is poor:

1. Be clear about the bank’s requirements. Make sure to carefully read over your loan agreement so that you know what the banks expects in terms of providing information and repaying the loan.

2. Manage your line of credit carefully. Business lines of credit are meant for small purchases and to provide instant financing to cover a cash shortfall. You should be aware of the amount of money leaving the account, as well as where the expenses are coming from. If you leave balances on your line of credit then make an effort to pay the monthly principle on time.

3. Know when to rest; know when to be active. If your business is going through a difficult patch and you are using your credit-line regularly, then consider “resting” the account every now and then. Resting the account means that you pay the entire balance and refrain from using the credit-line for a short period of time. This shows the bank that you have the ability to cover the account.

On the other hand, if see that your business is not using the account, because you have a positive cash flow, for example, then consider making a few small purchases on it anyway to keep the credit-line active.

4. Keep the lines of communication open. When times are tough, make sure to communicate with your bank about the situation. You will have a greater chance of holding on to the account after you give over your story personally. Where possible, even if business is fine, it is a good idea be in touch with your bank periodically throughout the year. This will help build a relationship that could prove helpful when and if calamity strikes.

5. In an emergency negotiate payment or turn to other financing. If your bank suddenly calls the full amount due, don’t panic. First try to negotiate the repayment of the outstanding balance. These days, there’s a good chance the bank will make it easier for you to pay the amount due. In the meantime, you should look for another line of credit. If you aren’t having any luck or you need the money quickly, then you can try other sources, such as factoring accounts receivables or turning to an asset-based financing arrangement.

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Microloans Provide Needed Financing to Some Small Businesses

As the economy continues to sputter along, the sources of traditional small business financing have been quickly drying up. Collectively, banks and commercial lenders are requiring more collateral while simultaneously approving smaller loan amounts. And this is coming as other personal financing products, such as home equity loans, are getting harder to come by. As a result, many new and growing small businesses have been forced to do a lot of scrambling about in search of financial support.

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One promising ray of hope for small businesses in this dismal environment is the SBA-based microloan program. Based on a financing system that was designed to help small businesses in Third World countries, the SBA started this program in the 1992 with the goal of offering accessible financial assistance and counseling to new and growing small businesses. There are currently several nonprofit, community-based intermediaries funded by the SBA. These microlenders provide small business loans as well as training and technical assistance to its borrowers.

Now, the economic stimulus bill recently approved on Capital Hill provides a $30 million boost to the SBA’s microloan program. This is in addition to the $20 million already earmarked for microloans.

Though loans from microlenders can range from less than $100 to as much as $35,000, with a term as long as six years, the average size of a microloan is $13,000 with an average loan maturity of 42 months. The interest rate can be negotiable, but it tends to be higher than it is for standard business loans (usually between 8%-13%). A microlender can also serve as a subordinate lender to banks, sometimes enabling the loan to be increased to $50,000.

As the recession continues to deepen, microlenders across the country are experiencing an increase in inquiries from would-be entrepreneurs and small business owners, including entrepreneurs starting “high risk” ventures and established businesses that have bad credit or a poor sales history. Most applicants are drawn to the availability of financing, the easy approval process, the personal touch that most microlenders have to offer, as well as the free business training and technical assistance.

If you are in need of a small loan to help get your business off the ground or to expand an existing business, this program is definitely worth checking out. For help finding a microloan lender, the SBA provides a listing of all the intermediaries that are part of the SBA’s microloan program. There are microlenders located in almost every state.

The Worst Mistakes to Make When Applying for a Bank Loan

At a time when the American economy is reeling from the effects of unfettered credit card debt, housing foreclosures, and price increases on everything from a gallon of gas to a can of tuna, bank loans are fast becoming a shrinking commodity.

According to a recent Federal Reserve survey, the banking world is responding to the economic turmoil by tightening the reigns in the lending department. This comes as sour news to consumers and small businesses in need of additional funding.

With the cards stacked up against many bank loan applicants, I thought it would be a good idea to post a list of some of the worst mistakes to avoid when applying for bank financing.

1. You don’t do enough research. Don’t make the mistake of applying at a particular bank just because it is around the corner from your house. Find out which banks have a reputation for approving the kind of funding you are seeking. Also, don’t be afraid to seek out alternative financing sources, such as credit unions, community organizations, and government programs as well as alternative financing methods, such as home equity lines of credit, accounts receivables factoring, and business cash advances.

2. Your paperwork is unclear or inaccurate. Make sure all the forms and documents that you submit to the loan officer are both clear and accurate. Trying to forge or leave out information that may reduce your chances of receiving the loan can easily backfire leaving you with a bad reputation and without your funding.

3. You provide insufficient information. Make sure you are familiar with the bank’s loan application requirements before you come to the interview. Some banks will ask to see your tax returns, and providing your current credit history and credit score is a must no matter how embarrassing it is! Business applicants will additionally need to bring certain financial statements, such as a balance sheet or income statement.

4. You present yourself and your business as financially or structurally unstable. A general rule of thumb when it comes to bank financing is to try avoid applying for a loan while you are in the process of making major changes in your life or your business. In other words, don’t apply for a loan in the middle of a move or a business restructuring.

5. You present yourself as unorganized and without clear direction. Banks are looking to fund people and ventures that will make them money. Period! Consumers need to be very clear about where and how they hope to spend the funding they receive as well as their ability to pay back the loan. Business owners need to take it a step further by providing a good business plan that details how the business operates, who it caters to, and what plans are in store for the future.

6. You are unprofessional at the interview. Your bank loan interview is just like any other. Make sure to be on time, courteous, and neatly dressed. Pay attention to how you express yourself (it may even be a good idea to rehearse a little before the actual interview). Try to avoid abrasive and vulgar language, and never insult the bank or acting loan officer.

7. Not so fast! The relief that comes with a loan approval may cause you to zip through the remaining paperwork and bank “formalities,” but you might want to pause before you so quickly sign the dotted line. Make sure you are very familiar and comfortable with the bank’s terms and conditions on the loan before you agree to anything. If you have difficulty understanding the legal jargon then take the documents to someone who can explain it to you. There is nothing worse than binding yourself to something you don’t want.

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Who Finances the Financier?

We all know that it is hard for small businesses to get financing these days from banks – it was never a piece of cake, and now that the credit crunch is on for so long we see it has gotten ridiculous.  But… did you ever wonder what a bank does when it needs financing?  Yes, banks need money too!  In fact, banks don’t just give you a hard time when you want a loan because they are unsure if you’ll default — they sometimes just don’t have the money.

Lenders, especially small ones, struggle regularly to find investors.  This is in part because of federal regulations placing restrictions and rules on investors who invest in a lending institution.  Basically, if a private equity fund (or other investment entity) owns 9.9% or more of a bank, then they are required to do special reporting and subject itself to regulatory scrutiny.  Beyond that annoyance, in order to own more than 24.9% of a bank, an entity has to register as a “bank holding company” and must be a “source of strength” for the lending institution.

To say the least, these can be big deterrents to investors considering investing heavily in a bank — when combined with the uncertainty about the future of lending, this makes for a shaky proposition for a bank in search of cash.  If the bank doesn’t have cash, it can’t lend you or your business any either!

It was recently reported in the Wall Street Journal that officials from the Fed have been meeting with various buyout firms to brainstorm issues and solutions which they face when considering investing in a bank.  If they succeed in finding a way to reinterpret /re-legislate the current laws, then more private equity firms may be able to invest in banks.  The real question is: given the current lending crisis, will any one will want to invest, even if the red tape is cut?

If you don’t want to wait to find out and you need cash for your business today, then check out alternative financing options like credit card factoring and business cash advance.