Searching for business financing can feel overwhelming. Between legitimate lenders, brokers, and outright scammers, it isn't always easy to know who you can trust. Unfortunately, scams targeting small business owners have become increasingly common, particularly in the alternative business financing industry.

At MyFunders, our experience in this industry has given us firsthand insight into the scams and deceptive practices that exist today. We created this guide to help you recognize the warning signs, protect your business, and make informed decisions when seeking business financing.

🚩 Red Flag #1: Upfront Fees

For unsecured working capital financing, legitimate lenders generally don't require upfront fees before you receive funding. If someone asks you to pay an "application fee," "processing fee," "insurance deposit," or any other fee before you've received funding, that's a major warning sign. At MyFunders, you never pay upfront fees for unsecured funding programs.

There are a few legitimate exceptions within the financing industry, including:

• Real estate loans, which often require an appraisal fee.
• Certain SBA loans, which may include government guaranty fees before closing.

Outside of those exceptions, be extremely cautious anytime someone asks for payment before funding. For unsecured working capital loans and business lines of credit, this is generally not standard practice.

🚩 Red Flag #2: "Starter" Loans

One of the most common scams today involves what's often called a starter loan. Here's how it works: you're offered a small, expensive financing deal and told it's simply to "establish a relationship" or "get you into their portfolio." The salesperson promises that once you complete this first deal, you'll qualify for a much larger financing offer on significantly better terms.

Some scammers go even further by showing you a fake approval or contract for that larger financing offer. They may claim it will fund immediately after you pay off the starter loan, or that after 30 days of payments on the starter loan, the larger financing will be used to pay it off. In reality, the promised financing never materializes. Instead, you're left with an expensive financing agreement you never needed and no larger financing offer.

If someone tells you that taking one financing deal is a prerequisite for receiving another, be extremely cautious. Legitimate financing should stand on its own merits, not depend on you accepting an expensive "starter" loan first.

🚩 Red Flag #3: Bait-and-Switch Approvals

You submit your application and hear the words everyone wants to hear: "You're approved." You send over your bank statements, tax returns, and other requested documents. Then, suddenly, the offer changes:

• Higher pricing
• Lower funding amount
• Shorter repayment term
• Additional unexpected conditions

It's important to understand that legitimate underwriting can result in changes to an offer if new information comes to light, or if the documents submitted differ from what was originally represented. When that happens, the lender should clearly explain why the offer was revised. However, if the terms change significantly without a clear, legitimate explanation, it may indicate a bait-and-switch tactic designed to pressure you into accepting a less favorable offer after you've already invested time in the process.

Don't feel obligated to accept an offer simply because you've already started the application. If the revised terms are substantially different from what was originally discussed, ask for a clear explanation. If one isn't provided, or the explanation doesn't reasonably justify the changes, don't hesitate to explore other financing options.

🚩 Red Flag #4: Dual Contracts

Be very cautious if you're asked to sign two financing contracts at the same time. This can be a warning sign of:

• Stacking — where multiple financing products are placed on your business at the same time, creating excessive payment obligations that can strain your cash flow.
• Bait-and-switch tactics — where you're asked to sign two financing agreements, but only one is actually intended to fund. The other may be used to pressure you into accepting different terms than you originally agreed to.

A transparent lender should clearly explain exactly what you're signing and why. If anything feels unclear, ask questions before signing anything.

🚩 Red Flag #5: The "Consolidation Buyout" Scam

This one often sounds like great news. Someone contacts you claiming they can consolidate your existing financing into one larger loan with lower payments. Then they ask you to wire money directly to them so they can "pay off" your current lenders.

Many business owners have lost substantial amounts of money this way. The promised payoff never materializes; the existing balances remain outstanding, and the business owner loses the transferred funds while still owing the original lenders.

Legitimate consolidations are handled through documented payoff procedures between financial institutions, supported by payoff letters and verifiable documentation — not by wiring money to an individual or third party based solely on trust.

If anyone asks you to personally transfer money so they can pay off your existing financing, stop and independently verify everything before sending a single dollar.

🚩 Red Flag #6: Fake Debt Consolidation Companies and "Debt Relief" Lawyers

This may be the most damaging scam in the industry. It involves companies or "attorneys" who claim they can fix your existing business financing and dramatically reduce your payments. Their instructions usually sound something like this:

• Stop making payments to your lenders.
• Ignore phone calls, emails, and collection notices.
• Send your payments to them instead.
• "We'll handle everything."

In practice, many of these companies simply collect payments from business owners without ever negotiating with lenders or forwarding those payments as promised. Meanwhile, the actual financing agreements go unpaid, accounts fall into default, collections begin, lawsuits are filed, and legal costs continue to grow.

Here's the part that catches many business owners off guard: relying on a third-party company generally does not eliminate your legal responsibility to repay your financing obligations. Courts typically won't consider "I trusted another company to handle it" a valid legal defense. You may still be responsible for the full debt, along with legal fees, court costs, interest, or judgments, depending on the circumstances.

If you're struggling with payments, contact the lender that funded your business as early as possible. A performing deal is in your lender's best interest, and most lenders would rather work with you to find a solution than see your financing go into default. When borrowers communicate early about financial hardship, lenders are often willing to discuss modified payment arrangements.

Never stop communicating with your lender simply because a third party tells you to. If anyone encourages you to ignore your lender or stop making payments, consider it a major red flag.

🚩 Red Flag #7: High-Pressure Sales Tactics

Be cautious if someone pressures you to sign immediately. Statements like:

• "This approval expires in 15 minutes."
• "You have to sign right now."
• "Don't think about it, or you'll lose the deal."

...are often used to prevent you from reviewing the agreement carefully or asking important questions. While financing offers can have legitimate expiration dates, reputable lenders should still give you reasonable time to review the contract, ask questions, and fully understand what you're agreeing to. They should also be willing to explain the terms before asking you to sign.

Never let anyone pressure you into signing a financing agreement you don't fully understand.

How to Protect Yourself

Before accepting any financing offer:

• Never pay upfront fees for unsecured working capital financing.
• Read every contract carefully before signing, and make sure you understand the terms and repayment obligations.
• Research the lender or broker by reviewing their company, website, and online reviews.
• Confirm you're dealing with the actual company by using the contact information listed on its official website.
• Never wire money to someone claiming they'll pay off your existing lenders on your behalf.
• If you're facing financial hardship, contact your lender directly before turning to a third party.
• Be skeptical of offers that sound too good to be true.
• Get every important promise or representation in writing.
• Never let anyone pressure you into making a financing decision before you've had time to review the agreement and ask questions.

A Note from the MyFunders Team

At MyFunders, we believe business financing should be transparent, straightforward, and built on trust. That's why we created a platform that gives you complete visibility from application to funding. Through your client dashboard, you can track the application process every step of the way, securely upload documents, receive offers, and communicate directly with your account manager.

If this guide helps you make a more informed financing decision, then we've accomplished what we set out to do. Stay safe, and if you're ready to explore your financing options, we're here to help.

— The MyFunders Team