While there are tons of small business loan options for you to consider, there are some lenders who aren’t regulated like traditional institutions and engage in unfair and abusive lending practices. These are predatory lenders and they can ruin your business.
In this overview, you’ll learn the top five warning signs to know for predatory lenders and tips to help you avoid them now and in the future.
What is predatory lending?
Predatory lending is when a lender engages in unfair and deceptive practices at the borrower’s expense. These lenders often offer high interest rates, high fees, and difficult terms, and are usually misleading or unclear in their communications. Once you agree to a loan from a predatory lender, repaying the loan becomes expensive and could even cause your business to close.
This is why it’s smart to start your business loan search with banks, Community Development Corporations (CDCs), and Community Development Financial Institutions (CDFIs), all of which are regulated by the federal government. These regulations ensure that they follow fair lending practices to maintain their licenses.
The top 5 warning signs of a predatory lender
How do you know if you’re talking with a predatory lender? There are several red flags, but theses are the top signs that you’re dealing with a predatory lender:
1. They pressure you into a decision
Predatory lenders often use aggressive tactics to force you into a quick decision before you fully understand their terms. For example, they might send repeated follow-up calls, texts, or emails claiming their offer expires in several hours or days. Reputable lenders will encourage you to take your time and ask questions before signing any documents.
2. They offer too-good-to-be-true terms
If a lender offers terms that seem too good to be true, like same-day approval and funding, this may be a sign that you’re dealing with a predatory lender. Other examples to look for include little or no documentation or guaranteed approvals. Even if the lender makes it easy to apply and get approvals, their terms are often extreme, such as daily or weekly repayments.
Reputable lenders could also offer quicker approvals and flexible requirements, so it’s important to ask questions and get clarity on what’s expected once you sign. Many non-profit lenders will offer more flexible approval qualifications as part of their mission to support local communities and underserved entrepreneurs.
3. Their terms and conditions are unclear
If a lender doesn’t proactively share the annual percentage rate (APR) for the loan or doesn’t clearly state the loan repayment term and fees in the loan materials, you’re likely dealing with a predatory lender. Responsible lenders will always be transparent and state these terms upfront. They’ll always ensure you have a contact you can talk to explain the terms and conditions.
Some predatory lenders offer chat services and phone numbers to speak to someone, but they often can’t answer your questions and will resort to using pressure tactics. If you leave those conversations with your questions unanswered, you may want to consider other options.
4. They make you pay upfront
Legitimate lenders are upfront about their loan programs and services and will usually include detailed information on what’s involved and what to expect on their website and materials. Predatory lenders, on the other hand, might require you to pay upfront to access their information or subscribe through paywalls.
5. They request private information before you start an official application, or they don’t ask for any information at all
If you’re asked for your private business information, such as bank statements or point-of-sale data, before you start an official application, this could be a predatory lender trying to steal your personal and financial information. Reputable lenders will certainly want to review your financial information in detail, but not until you’re submitting an actual application through a secure portal. An official application will ask for all relevant business information, including business type, ownership percentages, financial statements, and business and personal tax returns.
While it may seem like a lot to provide this information, know that responsible lenders want to ensure your business is capable and prepared to take on more debt, and this information gives them important insight for their consideration. If a lender isn’t asking you for enough information to decide, they may not have your best interests in mind and may be offering something that’s too good to be true.
Tips to find responsible small business lenders
Here are some strategies you can use to find responsible small business lenders and avoid predatory lenders:
- Do a local search and be specific: Start by finding lenders that have a presence in your community, county, or state. For example, if your business is based in Hartford, CT, you’ll find better options by using search terms like “Connecticut small business loan programs” or “small business loans in Hartford, CT” than you will from searching “business grants and loans.” While they may serve small business clients nationwide, lenders based in local areas are more likely to be legitimate small business lenders.
- Give yourself time: Many small business owners accept predatory business loans because they need financing now. It’s better to start your search for a responsible small business lender well before you need funding. This gives you time to thoroughly review your options and get a full understanding of what you’ll need to qualify.
- Use local resources: You can learn about your local business lenders, programs, and resources from your local Small Business Development Center (SBDC) and SCORE offices. These are both non-profit and trustworthy organizations in your local community that can guide you through this process.
Pursuit can help you get the responsible financing you need
Spotting predatory lender red flags can keep your business safe and lead you to responsible and affordable funding.
When you need a business loan, Pursuit is here to support your goals! We’ve worked will small businesses like yours in New York, New Jersey, Connecticut, Pennsylvania, Illinois, Nevada, and Washington to get the financing needed to grow and reach higher. We offer more than 15 business loan options, a line of credit, and business advisory services to support your business needs and fuel your entrepreneurial dreams.
Contact us to learn more about ways we can help you make your business vision a reality.
