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Stimulus Prompts Small Business Loan Scams

Q: My sons own and operate an architectural/engineering firm and a steel fabrication firm. These are Main Street firms, needing operating capital. What department of the stimulus package do they apply to for a loan?

—J.R., posted online

A: The American Recovery & Reinvestment Act (also known as the "stimulus package") signed into law last month provides $730 million to beef up the loan guarantee programs of the U.S. Small Business Administration. Part of that sum is supposed to reduce the fees that borrowers pay for SBA-backed loans and to increase government guarantees on the loans, making them more attractive for bankers. These measures are designed to help thaw the current credit freeze.

Another program in the works, a joint Fed and Treasury program known as the Term Asset-Backed Securities Loan Facility, or TALF, also aims to get credit flowing again to Main Street borrowers.

However, it is important for your sons and other small business owners to realize the government does not give loans directly to small businesses. The government works through commercial lenders, such as banks, by guaranteeing the small business loans of banks that participate in their loan programs.

The confusion on this point has unfortunately opened the door to fraudulent operators who charge fees purporting to help small business owners and individuals get government money, says Alison Southwick, spokesperson for the Council of Better Business Bureaus in Arlington, Va. "Anytime there's a story dominating the headlines, scammers are going to take advantage of it," she says. "When people hear the word 'stimulus,' they know that's something they heard about in the news, so it must be legitimate."

Hundreds of complaints have poured in to the BBB in the weeks since the stimulus package was passed, she says, most of them from people who responded to Internet ads leading to Web sites featuring "testimonials" from individuals claiming they got government money to start businesses or pay off bills. For a fee, many of the Web site pitches say, they'll send you a CD or a mail-order kit explaining how to have access to government stimulus money.

Lucky Winners?

These Web sites are extremely misleading, Southwick says, including some that incorporate blogs that appear to be written by the lucky winners of all that stimulus cash. However, not only is the government not cutting checks to would-be entrepreneurs, you don't need to pay for information about SBA loans or government grants (most of which are available only to nonprofit organizations or very specialized research companies).

"They're charging you for free information, in the first place. And maybe they send you a CD or maybe they don't. But what happens is that people's credit cards start getting billed and there's no way to stop it," she says. "A woman I talked to today said she started getting billed not only for the stimulus information but also $25 per month for a newsletter she didn't want, either."

Victims often wind up paying $60 to $80 a month, and if they don't realize it, the scam can go on indefinitely. "They keep on billing and hope that a certain percentage of people aren't going over their credit-card statements closely," Southwick says. Even those who catch the unwanted charges often find there's no way to stop the billing unless they cancel their credit cards.

The bottom line: Provisions of the stimulus package and other government programs are aimed at increasing access to government small business loans and getting the banks back in the business of loaning money again. Good information about SBA loan guarantee programs is available here. Other government sites offer free information about grants, student aid, and government benefits.

There is no reason to pay for software or guides to apply for government loans or grants. Companies that offer such information for a fee—when it is already available for free online—are likely to be scams, so stay away from them.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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