As you probably already know, and as a recent story in the NY Times highlights, business owners need to take care when giving information to financial institutions.
In times of financial strife, businesses and consumer households alike are finding themselves strapped for cash and short on options. Many businesses are turning to financial institutions that grant cash advances, sometimes called payday loans. Though the legality of payday loans varies by state, payday loans can be a valuable resource for businesses that encounter unexpected costs and find they don’t qualify for many traditional loans. But these businesses should be cautious when giving these lenders their banking information to allow for any automatic withdrawals; the terms of many of these loans—which often have interest rates as high as 1000 percent—are confusing and unclear. Sometimes, this confusion is more than just a miscommunication and the terms of the loan may be deliberately fuzzy so that lenders can illegally take money from consumer and business accounts with the help of inattentive or negligent banks.
According to the NY Times article, bank executives have been turning a blind eye to suspicious activity from lenders and other third-party financial institutions. One bank executive purportedly allowed a lender to continue making payment withdrawals from consumer accounts even though the lender was using a fake SSN and registering a vacant lot as his address of business. Or how about this story from a couple in North Carolina, where payday loans are illegal, who believed a payday lender would be taking $90 out of their account monthly to pay off a $330 cash advance only to discover that the $90 was going only towards the interest of the loan and not the loan itself; the couple ended up having to pay $600. Because of these oversights, several banks are now being investigated by the Department of Justice for allowing this kind of illicit activity.
If you’re running a small or startup business, you may be particularly vulnerable to this kind of manipulation. Your new business may not have had ample opportunity to build business credit, possibly disqualifying you for loans from traditional banks and credit unions. If your only option is to seek alternative lenders, there are steps you can take to ensure you’re providing your banking information to a reputable company. Nowadays, uncovering a company’s reputation can be a quick and painless process.
A business’s D&B® business credit profile can tell you about how long a business has been in operation and give insight into a company’s payment history with other companies, suppliers, and vendors. The range of predictive and performance-based scores contained within a company’s file can indicate a company’s net worth range and provide an overall rating for the company’s financial state. While this isn’t necessarily a clear sign that a business is legitimate, it can certainly be a part of the process in determining a company’s credibility.
Websites like the Better Business Bureau can also be a great resource in evaluating the reputability of a company; it includes information about how fast customer complaints have been addressed and whether the company has been involved in any lawsuits or other legal activity. While a clean Better Business Bureau profile doesn’t prove a company is trustworthy, it can help you avoid any businesses that have experienced an excessively high volume of customer complaints in the past.
Finally, after you’ve done all your resources, don’t be afraid to protect yourself by being extra cautious. Simple things like asking for references, requesting to see things in writing, and hanging up from an original sales call and dialing the number yourself may seem excessive, but it can’t ever hurt. Most importantly, never engage with a company that makes you feel unnecessarily pressured or uncomfortable.
There are lots of reputable alternative lenders out there who can help you gain access to capital when you’re low on funds, so exercise caution, but don’t be afraid to thoroughly investigate all your lending options.
Photo credit: redspotted, Flickr.