Today's financial markets are riddled with con artists
and incompetents who prey on capital-starved business
owners and consumers, promising them every variant of
easy money. It's hard to say just how many business owners
are victimized by those scamsters, but here's one indication:
more than 100,000 people contacted the Better Business
Bureau during 1994 and 1995 to request a guide about common
money-broker scams that target businesses.
While money-raising scams vary, they usually share one
common element: a demand for up-front fees, which can
range from hundreds to many thousands of dollars. Since
the customers don't stand a chance of gaining the capital
they need, they wind up in worse financial shape than
ever. Some disreputable money finders disguise their offers
so that they seem to suggest the involvement of the Small
Business Administration, and others promise to help attract
venture capitalists or angel investors. Still others "guarantee"
approval for bank credit lines or corporate credit cards.
The con artists make their approaches by telephone, in
print advertisements, through E-mail, or sometimes in
person at trade shows or industry conferences.
The bad news: such scams are more common than ever.
"We've really seen an increase of business-related
financing fraud since the late 1980s," notes Dan
Parsons, a vice-president of the Better Business Bureau
of Metropolitan Houston. "It's a combination of a
lot of different factors: the last recession; more people
being laid off, starting their own companies and needing
financing help; and the development of the Internet."
(The Internet's great charm for scam artists is that it
allows them to approach potential victims anonymously--while
avoiding mail-fraud charges if caught. Most consumer advocates
say it's safest to avoid all Internet financing advertisements.)
Sometimes, so-called money brokers aren't crooks; they're
just incompetents no better qualified to find money than
their customers are. Either way, business owners lose
out if they've paid large up-front fees. Parsons recalls
one case that revolved around a lawyer who set up shop
as a loan broker. The problem: he had no special contacts
or expertise in the field--and never managed to raise
any money in return for his fees.
Although there are many legitimate financial intermediaries,
small-business owners can never be too careful about checking
out a money finder's credentials-- before paying any fees.
"It may seem obvious, but you've got to get the names
of customers who have received capital with the money
finder's help--and then you've got to check out those
customers," emphasizes Shirley L. Rooker, president
of Call for Action, a nonprofit consumer hot line based
in Bethesda, Md. "Don't just call the references
on the phone; make sure they're legitimate companies as
well, and not just 'shells' set up to fool potential victims."
Besides checking references, Parsons advises, take some
additional precautionary steps. Before retaining a professional
to help you raise money, check with the Better Business
Bureau and your state attorney general's office to see
if any complaints have been lodged against his or her
company. Then check the phone book to make sure the company
has a listing; fraudulent businesses change their names
or locations frequently to escape bad reputations. Next,
make sure the business has a physical operation and visit
it; if possible, talk to the landlord about the company.
Then ask the money finder about his or her specific sources
of financing--and call the sources to verify the information.
As a final precaution, make sure your lawyer inspects
all contracts before you sign them. Scamsters, of course,
will try to skip the contract stage entirely. Be wary.
"It's only natural for both parties to clarify their
expectations in a written contract or letter of agreement.
If the money finder won't write one, then you should do
it, spelling out how much you expect to pay and, in complete
detail, what you expect to receive in return," explains
Mark E. Young, a partner in the Boston law firm of Peabody
& Arnold. If the other party refuses to sign, look
If you're thinking of engaging the services of a money
broker, watch out for these red flags:
"Guaranteed" loans, credit, or venture-capital
investments. There's no such thing as guaranteed capital.
When it comes to capital searches, any words that suggest
certainty are tip-offs of potential problems.
Up-front fees. Given the prevalence of scams, many--although
not all--consumer advocates agree that the safest course
is to avoid any deal that involves an up-front fee. Instead,
try to negotiate fee structures tied to the amount of
funds actually raised.
Pitches over the Internet. The Net is one of today's
fraud vehicles of choice, since crooks don't have to worry
about charges of mail fraud if they're caught.
Nigerian-letter scams. One "easy money"
scam consists of letters sent to businesses or consumers,
saying money is available for them from distant locations,
often Nigeria. Con artists then request bank-account information
(so they can loot accounts electronically) or demand large
up-front payments to cover expenses.
If you've been scammed, you may be able to gain assistance
• Your state attorney general's office,
• Your local Better Business Bureau,
• The Federal Trade Commission (202-326-2222),
• The local branch of the U.S. Postal Service if
a solicitation through the U.S. mail was involved, or
• The not-for-profit Call for Action (301-657-8260).
From: Inc. Magazine, Jan 1997 | By: Jill Andresky Fraser