Advance-fee loans are back with a vengeance on clarkhoward.com

RIP-OFF ALERT: Here's an oldie but baddie that dates back some 20 years ago to Clark's first days on the air.

According to the FBI, advance-fee loans have roared back into action after years of being off our radars. Business owners and individuals are the typical targets.

Here's the way it works: Businesses are in a cash crunch because so many lenders are reducing or shutting down their lines of credit. That creates a fertile ground for smooth-talking con artists who represent themselves as being industry experts on finding loans. Unwitting victims get taken when they pay them an upfront fee for loan origination -- and never hear from them again.

The Wall Street Journal reports that some 100 business owners lost untold millions recently in one week because of this practice. But it's not always big-money targets the crooks go after. In one instance, the owner of a daycare was taken for $2,000 in the hopes that she'd get a $20,000 loan. On the other end of the spectrum, another business owner seeking a loan of $250 million wound up paying $260,000 upfront.

The answer to the credit crunch is never paying someone a fee to get loan for you.

There is, however, a related gray area -- and that's selling off credit card receivables. It's a way to generate revenue today on income that will be coming to you down the road. While this practice isn't illegal, it does often come with a massive rate of interest that can be upwards of 60%.

So if you're a small business owner in need of funds, see if you can find another way to keep things going. Selling your credit card receivables may be legal, but you may just dig yourself into a deeper hole.

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What others are saying

Advance fees? Talk to the major players.
Ignorance is obviously bliss. In commercial lending, that is the area businesses typically deal in for a variety of financial needs, large and complicated transactions are extremely expensive to analyze. $10,000 to $25,000 deposits submitted with applications are not, and never have been, unusual. See Golodman-Sachs link http://www2.goldmansachs.com/services/financing/lending/commercial-mortgage/products/fixed-rate-program.html.
If you believe that any commercial lender is going to front the substantial costs they would need to incur to determine whether or not any proposed project, like the $250 million example you gave, without a sizeable financial commitment from the business or person seeking these funds, you need to be re-educated in the world of commercial lending. factoring is an entirely different set of rules.
By John @ 07/16/08 07:20:22 PMreport abuse
Factoring
As someone who actually wrote factoring software for a local bank in 1999 I can tell you that "factoring" for small businesses is like taking drugs. Once you start factoring your invoices you can't stop and the APR for factoring is outrageous. Plus the factoring entity controls when those deposits are eventually collected, calculates what you own in interest and then takes it out of the paid invoice before making the final deposit to your account. I was not impressed with the folks that were in this business even though they were associated with a large local bank. So tread carefully.
By Ben @ 07/16/08 10:57:51 AMreport abuse
A Necessary Evil?
As a small business owner who survived the credit desert of the late '80s and early '90s, I remember well the companies that preyed on our weakness and need for cash. We dealt with a "factor" that advanced us 80% on U.S. government invoices for the low, low fee of "only" 4% of the total, and 1.5% per month interest. That's over 40% APR interest, but hey, it kept the doors open when banks wouldn't give us the time of day.
By John @ 07/15/08 09:30:37 PMreport abuse

Advance fees? Talk to the major players.

Ignorance is obviously bliss. In commercial lending, that is the area businesses typically deal in for a variety of financial needs, large and complicated transactions are extremely expensive to analyze. $10,000 to $25,000 deposits submitted with applications are not, and never have been, unusual. See Golodman-Sachs link http://www2.goldmansachs.com/services/financing/lending/commercial-mortgage/products/fixed-rate-program.html.
If you believe that any commercial lender is going to front the substantial costs they would need to incur to determine whether or not any proposed project, like the $250 million example you gave, without a sizeable financial commitment from the business or person seeking these funds, you need to be re-educated in the world of commercial lending. factoring is an entirely different set of rules.

By John @ 07/16/08 07:20:22 PMreport abuse

Factoring

As someone who actually wrote factoring software for a local bank in 1999 I can tell you that "factoring" for small businesses is like taking drugs. Once you start factoring your invoices you can't stop and the APR for factoring is outrageous. Plus the factoring entity controls when those deposits are eventually collected, calculates what you own in interest and then takes it out of the paid invoice before making the final deposit to your account. I was not impressed with the folks that were in this business even though they were associated with a large local bank. So tread carefully.

By Ben @ 07/16/08 10:57:51 AMreport abuse

A Necessary Evil?

As a small business owner who survived the credit desert of the late '80s and early '90s, I remember well the companies that preyed on our weakness and need for cash. We dealt with a "factor" that advanced us 80% on U.S. government invoices for the low, low fee of "only" 4% of the total, and 1.5% per month interest. That's over 40% APR interest, but hey, it kept the doors open when banks wouldn't give us the time of day.

By John @ 07/15/08 09:30:37 PMreport abuse

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Jul 15, 2008 -- Advance-fee loans are back with a vengeance

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