Why Loan Scams Are Increasing

Scammers are taking advantage of the credit crunch to entice small business owners with fake loans. Here's how to identify the warning signs

by Karen E. Klein

Bad times bring out the bad guys. Whether it be a national tragedy, natural disaster, or economic downturn, fraudsters are looking to capitalize on people's pain. This time, it's the credit crunch that is fueling redoubled targeting of loan scams aimed at small business owners, says Alison Preszler, a spokesperson for the Better Business Bureau (BusinessWeek, 2/21/08). She spoke to Smart Answers columnist Karen E. Klein recently about the uptick in the BBB's fraud complaints and how entrepreneurs can avoid falling for a con. Edited excerpts of their conversation follow.

Small business owners have seen their access to funding squeezed recently. Are there con artists stepping into this void?

Yes, it seems that they are, given the increase in the number of complaints we've been getting. In 2006, we got 1,700 complaints about advanced fee loan scams. In 2007, that number jumped to more than 3,000. In 2008, we've already gotten 400 or 500 complaints.

How do criminals reach out to the small business owners who become their victims?

They set up sham companies that send out e-mails or call people on the phone to say they're preapproved for a credit line. With the credit crunch, people are digging down into their cash reserves, and they may be desperate to find money to keep their businesses going or to grow. This environment is where we see scammers finding ways to get in and take advantage of the economic downturn.

Are these new scams they're running, or the tried-and-true varieties?

These scams are not new. They've been around for a long time, but it's unbelievable the amount of people who lose money to them.

If they've been around so long, and they're so ubiquitous, why does it seem to be so difficult for law enforcement to shut them down?

The government does go after them, but consumer issues aren't at the top of the law enforcement priority list right now, with a war in progress and the threat of terrorism. Also, it's not easy to prosecute these guys. A number of them are based overseas, primarily in Canada and Africa, and most of them are online. So the scam Web site is up one day and down the next, and the perpetrators have moved on. They're hard to trace. We feel that the best thing we can do is educate the public about how to avoid these frauds.

That doesn't mean that people who get taken advantage of by a scam should just put it behind them. They should absolutely contact the BBB, file a complaint with us, and contact their state's attorney general. Some state prosecutors are more active than others, but it never hurts to file a complaint. If the attorney general's office gets enough volume of complaints about a company, they'll dedicate some time and resources to prosecute them.

How much are small business owners losing in these frauds?

It varies, but most lose a couple thousand dollars up to $26,000, which is the largest amount we've recorded so far.

Can you describe how the most prevalent scam works?

The advance fee loan scam targets small business owners looking for money to grow their businesses. Maybe they're trying to get a construction loan, but they've been turned down by traditional lenders. Then a company draws them in and tells them they are going to qualify for a loan worth a couple hundred thousand dollars. They'll say it's your lucky day, and all you have to do is send some money to cover administrative costs, or taxes—they use any number of excuses.

Next, they ask for a wire transfer or a cashier's check to cover these initial loan costs. Once the entrepreneur sends the money, many of the scammers simply disappear: Their phone gets disconnected and there's no way to get a hold of them. Other times, the scammers manage to string their victim along for a couple of weeks, asking them to send more money to "complete the transaction." They keep this going until the victim finally catches on, then they disappear.