Business Financing Red Flags You Should Notice

business finance

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When you are looking for small business financing, there are a lot of things to consider. From terms and rates to special conditions, your search can become a whole new workload. Yet, this is a process you can’t skip.

Actually, before signing on the dotted line, you have a lot of homework to do because there is not just the matter of searching for the right kind of small business financing for your strategy, you will also need to compare your options out there. 

And most importantly, you need to weed out the bad small business financing from the good ones. So, yes, instinct is an important part of this process because if it sounds too good to be true, it probably is. 

Before Signing

Pay attention to the red flags that can make you take a wrong turn and accept conditions that neither you nor your company can or should accept. There are a lot of things to consider but the most common red flags in small business financing are:

1. Inconsistent Terms

Maybe the seller is amazing and convinces you to take this particular loan, or maybe it’s a matter of really good wording in the online publicity you found, but when you read the final terms on the contract, they are different from the promise pitch.

It doesn’t matter what you were promised. The real terms are the ones in the contract so be sure to read it through and make sure that everything matches. Even if they pressure you, you can always refuse to sign a contract that is not what you expect without repercussions.

2. Zero Fees

It’s not a zero-fee option, but you have to remember that fees and rates are the financial institution business. After all, these companies need to earn money to continue lending money.

With this in mind, if there is an option with no fees and extremely small rates, it could be just a selling pitch to lure you in and then you find those hidden fees after you have already spent the money. 

3. Early Payment Is Not Accepted

If you have the money to pay off your debts, you should be able to, and having no provisions, like paying less because of interest rates you won’t be paying, it’s not a good move for your plan.

Especially considering that you could, in any case, access a bigger loan to consolidate debt. If you can’t find a clause that defines this, ask your executive and be sure to understand this particular point. 

4. Really Big Rates

Or really small ones. It’s the same, there should be a balance among the market because, even though some financial companies use this strategy to build up their client base, it could mean that the loan is too small, not as great as it sounds, or even that the fees are going to be higher.

It’s all about balance. Make sure you choose the right option that complies with everything you need. 

5. The Loan Is Not as Big as You Expected

Under borrowing can be as bad as over-borrowing because you won’t be able to execute your full strategy and, therefore, you won’t have the returns you are expecting.

Always choose the loan that fully covers the amount you need to implement your vision. And never accept more money than what you need because that extra cash could be lost in everyday operations and won’t be implemented properly to have a real return. 

6. Initial Payment Required

Warning! You should confuse secure loans with a down payment just to access financing.

Secure loans are especially great for people with bad credit because it helps them healthily rebuild their score, but these funds are a warranty for the financial institution that you’ll pay back what you borrow. Very different from having to pay someone in advance anything. This could be a scam. 

7. Vague Explanations

When you sign a contract, any contract, it is your obligation to read it through and through. But it’s also an obligation of the other party to explain what you don’t understand.

Terminology can be confusing or even the wording might be written to confuse you. Remember what teachers said to you when you were young: there are no stupid questions. Ask them, make sure you understand the answer, and ask them again if you don’t.

8. Much Invasiveness

From ads, emails, and even phone calls at all times, a company that is not serious can become an invasive subject.

Trust your gut because it is expected that an executive will follow up on your information request, after all, it is his or her job. But writing you emails, texting you, or calling you on the weekend, after hours, ten times a day is not normal.

This could be a scam to get hold of your sensitive information and drain your accounts.

9. They Throw in Things to Sweeten the Deal

There are promotions, sure. And when you get extra things for your business, it’s nice. But someone who is up to no good could be spotted when he or she is trying to convince you by any means necessary, say a fee discount, bonuses like paying fewer months, a gadget or any kind of giveaway, a license for your business.

If you are offered any of those things, check with the main office or brands to see if they have those promotions associated with the financial institution.

10. They Request Sensible Information Upfront

No serious financial institution will ask for your Social Security number, bank accounts, or other sensitive information without previous meetings, documentation, pre contracts, and other protocols to ensure the safety of your data.

Remember that identity fraud is quite common and it only takes a slip. Your contact information is fine, but more than that, it has to come with legal protections.

11. No Brick and Mortar Establishment

New fintech models don’t require multiple branch offices, it’s true. But they do require a physical address, for starters, to draft contracts.

So, if you can’t find their address or if you find out that they lie about it, they might not be an actual company, and could be nothing more than a website.

Where would you go with a complaint if you don’t know where they are? Don’t fall for it. Always triple-check who (and where) you are making deals with. 

Other Details to Take Into Account

Before you decide on taking on a loan, there are other things to consider, even though the financial institution looks legitimate. Take a closer look into:

  • Your small business financing options will have to take less time than the lifespan of your purchase. You don’t want to keep paying a loan for a computer that already broke down or inventory that is no longer on the shelves. Theoretically, the reason you ask for money for these things is to have that money back with revenue, a product of your hard work and not to pay for the rest of your life. 
  • The cost of financing could be too high in the long run and you could end up paying 300% more than you were loaned. Use a business loan calculator to understand perfectly well how much this fast money will cost and choose an option that makes sense and is willing to pay. 
  • The reputation of the financial institution is something you definitely need to research. Use search engines like Google to find what people say about this company online, look for reviews, ask your friends and family. Because there is one thing that you are told by professional salespeople and another very different one, the experience that people have with their services. 
  • Client service has to be high quality because you’ll need to follow up on multiple things over your contract or debt lifespan and you could have a lot of headaches if they don’t have good services. You can find out about it on social media, where people complain the most. And a good measure is to evaluate the presale client service that, in any case, should be tight and wonderful. 
  • The chemistry with your executive should make sparks fly. A good relationship with him or her will help you in the long run. You can cut corners when dealing with doubts, need explanations, and extension of a loan or other details with the financial institution. And honey attracts more flies than vinegar so, build this good relationship, nurture it and you’ll see that your relationship with the whole financial system will be different or maybe not because this executive can help you but because you’ll understand it better and you’ll know human beings are behind those financial statements

Knowing these red flags in small business financing and paying attention to them, you can safely research for other options to start that project you have in mind. Are you ready to choose your ideal lender?

Let us know in the comments if you need assistance or if you have any questions about business financing.

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