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How to Avoid Shady Small Business Lenders 

Mike Berner
Mike Berner

Look out for these red flags before you sign on the dotted line.

If you’re reading this, then you probably have an idea for a business. Maybe you’re already a business owner and trying to expand. Either way, you have everything you need to execute your vision — except for the money. It always comes back to money, doesn’t it?

The commercial lending industry can be a great way to get funding for a small business. Unfortunately, it’s also a minefield of sketchy characters looking to take advantage of unsuspecting borrowers who don’t know much about finance. High-pressure sales tactics and complicated financial jargon can confuse business owners who aren’t prepared. Following the below tips can help you avoid shady small business lenders and find the best loan options for your business.

>>Read next: Don’t Go Broke — The Best Ways to Save When Starting a Business

Understand your loan options.

Don’t let a lender shoehorn you into a financing product that isn’t appropriate for you. Before you begin your search, you should know the different types of loans available. Some examples include Small Business Administration (SBA) loans, term loans and lines of credit. Each has its own advantages and disadvantages and it’s essential to understand them before you apply for a loan. 

Backed by the SBA, these loans are highly sought after for their low rates and flexible terms. Applying for an SBA loan is a no-brainer for some business owners, but these loans also require more paperwork and have stricter eligibility requirements. Term loans from a traditional bank or an alternative lender offer a fixed interest rate and a set repayment schedule, but they may have higher interest rates than other types of loans. 


Term loans are usually favored by small businesses for their lower rates and longer repayment periods.

Business lines of credit offer more flexibility. For an annual maintenance fee, your business will have access to a source of funding you can use at any time for any reason. Businesses usually draw down lines of credit during a financial emergency, so it’s a nice resource to have for when times are tough. However, interest rates are often variable. [Learn how to choose a business loan.]

Avoid ‘guaranteed’ funding.

Be wary of lenders who promise “guaranteed” loans or approve loans without checking your credit. Legitimate lenders will always check your credit and won’t promise guaranteed approval without looking at your financial situation. 

Often, lenders will first perform a “soft” credit check, which means they get to review select information from your credit report. Soft credit checks don’t affect your credit score and aren’t visible to other lenders. As a final step, lenders usually request to perform a “hard” credit pull, which is visible to other lenders and impacts your credit score. Of course, there are funding options for businesses with low credit, but exceptions to this general rule are very rare. [Find out the difference between a business credit score and a personal credit score.]

Know your APR.

Ideally, you want to pay the lowest interest rate available to you. This is easier if you maintain an excellent credit score. However, sometimes paying high interest is unavoidable, especially if you need a fast business loan or are looking for a business loan with bad credit

No matter the circumstances, make sure you know how much interest the lender wants to charge. The annual percentage rate (APR) represents the amount of interest you’d pay every year. Sometimes, lenders will try to hide the true amount by presenting the interest rate in monthly terms rather than annual terms. Don’t be fooled by these too-good-to-be-true numbers. For example, a monthly rate of 3 percent means you could end up paying 36 percent in interest expenses over the course of the entire year. Be sure you know how to calculate loan payments so you can compare offers. 

Did You Know?

Lenders who work with businesses with bad credit usually look at a business’s fundamentals rather than just your personal credit score when deciding whether to approve your loan application.

Don’t borrow more than you need.

Legitimate lenders will work with you to find a loan amount that’s appropriate for your business and finances. They will take into account your revenue, expenses and credit history to determine the right loan amount for you. Predatory lenders, on the other hand, may try to push you to borrow more than you need, which can put your business at risk. More funding isn’t necessarily better because the higher the loan amount, the more interest you’ll pay in the end. 

Make sure you get a loan estimate early in the process before you get too committed. As our review of Noble Funding highlights, this transparent lending company trains its representatives to give applicants a rough estimate of potential funding as soon as possible so you know what’s possible. Other lenders may drag out the conversation to make a sale. Make sure you create a budget for your business so you have a clear understanding of the amount of financing you need before you start your funding search. 

Read the fine print.

You also need to be careful with lenders who ask for a large down payment or collateral before approving a loan. Make sure you’re familiar with the difference between a secured loan and an unsecured loan. A secured loan requires you to put up collateral, while an unsecured loan doesn’t. Often, unsecured loans carry higher interest rates while lenders may move to seize your collateral if you fail to pay a secured loan. 

Carefully review all documents that require your signature and make sure you understand what they mean before you sign. Legitimate lenders will always provide you with clear and detailed information about the terms and conditions of the loan, including the interest rate, repayment schedule and any fees. Be on the lookout for hidden fees in your business loan repayment terms


Potential hidden fees include prepayment fees, yield maintenance fees and origination fees.

Preparation is the key. 

By being aware of the red flags we highlighted above and doing your research, you can protect yourself from predatory small business lenders and find the best loan options for your business. Many different funding providers exist to fill different needs, including the SBA and traditional banks. Businesses that are ineligible for SBA loans and other conventional forms of funding should consider alternative lending options

Whatever path you choose, don’t allow yourself to be bamboozled by unscrupulous sales practices and complex financial jargon. Remember: Never rush into a loan decision and always know exactly what you’re agreeing to.

Image Credit: Zadorozhnyi Viktor/Shutterstock
Mike Berner
Mike Berner
Staff Writer
Mike Berner is a staff writer at and Business News Daily specializing in finance. Mike has a deep background in the financial world, having written hundreds of articles and blog posts on financial markets, business and investing. He holds a B.A. in economics and a B.B.A. in finance, both from the University of Massachusetts, Amherst. Prior to his writing career, he performed quantitative analysis and research as an economic analyst.