Tips for avoiding business financing scams – Part 2

All business financing scams share a common identifiable theme: the large, non-refundable front fee which the charismatic promoter of the scheme reassures you will be returned after to you after your loan is funded. If you take the bait for such a scheme you will inevitably find that loan or investment will not be forthcoming for one reason or another and that you have no legal recourse against the promoter.

An example of the front fee scam is the “self-liquidating loan”. In this variation, the promoter will tell a prospective borrower that after obtaining some significant amount of money from the borrower that some type of collateral (single-premium whole life policies or zero-coupon treasury bonds are usually cited) will be purchased which will be used to obtain a conventionally amortized bank loan. The borrower is further enticed with the promise of an additional payoff at the end of loan term. The only problem with this scheme is that conventional lenders do not make loans secured in this way. Only after the prospective borrower has been separated from his hard-earned cash does this fact become apparent.

The best defense against business financing scams is a realization about some common sense facts concerning available sources of funding for new ventures. For unproven business ventures the potential funding sources boil down to the following: Angel Investors, Friends and Family or personal lines of credit. Any other type of financing requires an existing, profitable business with some type viable collateral. Watch out for anyone who tells you something different than this: they are promoting some type of front-fee scam.