More often than not, getting a startup off the ground requires entrepreneurs to raise funds from different sources. However, the startup financing space has been laden with scams. In many parts of the world, scammers work hard to separate startup owners from the funds they raise by taking advantage of their inexperience.
Besides this, identity theft, data breaches, and online scams have become widespread as scammers leverage improved financial technology to collect financial data from consumers. The fight against scammers seem hopeless, but all is not lost. If you need to get financing to start or grow your startup to the next level, there are several things you can do to keep scammers at bay.
This article will explore five tips on how you can avoid scams when financing your startup:
1. Avoid Unsolicited Loan Offers
A common sign of scams in business finance is unsolicited financing offers. Ordinarily, legitimate lenders rarely use cold calls to find startups that need funding. In fact, the opposite is true—most genuine lenders get overwhelmed by financing requests from startups.
To avoid scammers from taking advantage of your startup, keep tabs on services or information that you subscribe to. Always remember that though there are many legitimate startup lenders or financiers out there, none of them will be willing to finance your startup without you taking the initial step to request for a loan.
2. Don’t Pay Financiers Upfront
If you’re looking for startup financing, and you come across a broker or a lender who asks you to pay some money upfront, you need to back out. When asking for advance payment, scammers can claim that the money is for taking care of administrative, credit check, processing the finances or insurance costs.
Whatever their reasons are, nothing justifies an advance payment when you’re seeking business payment. If you’re working with a loan broker, payment for their services is done by the lender in the form of a commission once the deal is completed. Even so, there are times when you’ll be required to take care of origination costs.
Origination costs vary depending on where you’re getting a loan from. These costs are rarely significant and are only charged after your loan has been approved—this shouldn’t be paid upfront before a loan is approved. Always be cautious with lenders that want upfront payments as there’s a high chance that they’re scammers.
3. Check Financier’s Contact Details
When looking for startup financing, you need to do a background check on possible financiers. One of the things you need to check when undertaking due diligence is their physical location and contact details. In most instances, scammers will not have a physical address and their contact information cannot be found easily.
If you can’t find clear contact details about a potential financier or their physical address, the company is mostly a scam. Even if the financier operates online, their contact information and location of their head office should still be available on their website. Keep off any company that’s difficult to reach.
4. Evaluate The Loan Approval Process
When you’re seeking for a loan to fund your startup, you’re never sure about getting approved. Legitimate lenders often have a rigorous loan review and approval process. As such, it’s not possible for loan officers to guarantee that your loan application will be approved.
If you come across a financier or lender who assures you that you’ll get the loan you’re seeking, that’s a huge red flag. Scammers use this tactic to keep you from approaching other lenders. Though you may be experiencing challenges getting a lender, keep off financiers that don’t have a clear loan approval process or those that accept loan requests without asking questions.
5. Avoid Lenders Who Want You To Act Immediately
There are lenders who claim they help startups in getting financing. However, they pressure them into taking immediate action. If you meet such lenders, they’re likely to be scams. Legitimate lenders don’t push startups into rushing financial decisions such as loans.
Instead, they work with startups to achieve their goals while offering them steady loan rates. Take time to read the fine print and find out what good things a financing offer provides for you. If you realize that the offer is too good to be true, get out of the discussion to avoid losing money or finding yourself in a high-risk situation.
Startups are great because they bring to life innovative ideas and foster economic growth in an area. However, they often require external funding for them to grow to the next level. While there are many genuine startup financiers out there, the number of scammers is equally as high.
To avoid being scammed, you need to know which tactics you can use to distinguish between financiers that are legitimate from those that are not. Consider the five tips discussed above to do this.