Quick small business loans: how to avoid scams

One of the biggest and most consistent challenges faced by South African SMEs is securing quick small business loans. Because cash flow represents the lifeblood of SMEs at this stage of growth, speed is of the essence – specifically, a mode of speed that is not possible at the institutional pace of most traditional lenders. In a country where SMEs make up the lion’s share of local economic activity, this means that demand for efficient business funding is widespread.  

In response to this demand, the SME financing sector has emerged as a thriving source of funding opportunities for growing South African businesses. The SME financing sector is made up of many legitimate funders who are invested in building sustainable and mutually beneficial partnerships between lenders and borrowers. But the currently unregulated sector is also populated with unscrupulous and reckless lenders whose so-called services threaten to sink the very same SMEs that they purport to help out. 

To be clear, there are plenty of SME finance providers who can provide quick small business loans without jeopardising the business itself. But it pays to exercise caution when researching funding providers. By looking out for the following red flags, you can protect your business against illegitimate scams and high-risk loans. 

Red flags: how to avoid ill-advised quick small business loans 

A loan scam operates by offering quick small business loans under false pretences. This mechanism often involves unverified lenders posing as governmental groups requesting upfront application or proposal funds from unsuspecting SMEs. The Department of Small Business Development (DSBD)  has previously warned SMMEs against fraudulent agencies purporting to be entities of the department. 

SMMEs should exercise particular caution against this type of fraudulent behaviour during times of national emergency. Opportunistic and predatory lenders will take advantage of business leaders who are already under pressure to manipulate them into paying “outstanding funds” that are not actually owed to anybody. “Cyber criminals use emergencies such as the National Disaster to steal money from victims, perform identity theft or pretend to be representatives of the department and its agencies using fake emails to scam unsuspecting recipients,” says the DSBD. 

New scams are concocted every day, but there are some common features of business funding scams that can tip borrowers off to fraudulent imposters. These are the red flags to be vigilant of: 

• Pressure to act immediately – by creating a false sense of urgency, predatory lenders can get discerning business leaders to overlook suspicious behaviour. Your financier can offer speedy services, but you should never have to make financial decisions, disclose sensitive information, or sign documents on a tight deadline  
• The offer of guaranteed approval – if a financial provider is offering access to credit without conditional qualifications like a minimum credit score, proof of income, and a minimum trading history, they are likely offering suboptimal loan conditions if not running an outright scam 
• Demanding payment upfront before you’ve laid eyes on any paperwork or proof of services rendered
• Requesting payment through untraceable methods like cash, a prepaid card, or even cryptocurrency 
• So-called government agencies who text or call claiming that you owe them money 

Not all unethical loans are illegal 

Scams are one of many threats to SMEs in the SME financing sector. Many loan schemes are not illegal and therefore not technically scams but, by nature of being high-cost and high-risk funding options, they are ill-advised ventures. As regulatory body SASFA points out, the micro-lending space is a hotspot for reckless lenders whose practices can cause long-term damage to the small businesses they are supposed to be helping. 

One example of reckless lending, which is not illegal but is unethical, is “stacking”. Stacking refers to the practice of extending funding to SMEs who already have outstanding loan balances with other short-term lenders. Stacking can run SMEs into the ground because, if and when they become over-indebted to their creditors, SMEs are conscripted into servicing their outstanding debts instead of investing in growth opportunities. Industry regulators like SASFA act to ensure that stacking does not take place amongst its duty-bound members. 

Green flags: how to identify quick small business loans that serve your interests

There is nothing inherently dangerous about speedy funding solutions. Many legitimate SME finance providers recognise that traditional funding routes simply take too long for small businesses that need funding, like, yesterday. In these cases, finance partners offer speed as a unique selling proposition, not a pressure point to entrap SMEs in unfavourable lending schemes. 

Nevertheless, as we explained with the example of stacking, many SME finance service providers operate legally without operating in the SME’s best interest. In cases like this, it may be more productive to learn how to identify lending green flags rather than red flags. 

Green flags to look for in SME finance providers include 

• A working website with clear and transparent explanations of how each of their finance products works 
• An up-to-date blog resource stocked with informative articles about the business 
• Certified SASFA affiliation 
• Contactable staff members with business email addresses and phone lines 
• Transparency indicators like a free-to-use business loan calculator which lets prospective clients see approximately how much their services are likely to cost the business
• A freely accessible privacy policy which details if and how your information is handled, stored, and circulated amongst third parties 
• Transparent terms and conditions which are disclosed before a contract is signed 

If you’re dealing with an SME finance provider who demonstrates these trust indicators, you are likely dealing with a trustworthy funding partner who has your business’s best interest at heart. 

Your need for speed shouldn’t leave you vulnerable to predatory lending 

Here’s the bottom line: South African SMEs need fast, accessible, and secure business funding to survive and thrive. If speed is what you’re after, there are safer and simpler ways to attain it with Bridgement. 

There are three things that you need to know about applying for Bridgement’s simple working capital facilities: 

• It’s 100% online, 100% free to apply, and 100% secure 
• There’s no paperwork 
• You could have up to R5 million in business funding in your account within 24 hours 

Feel free to cruise through our guides to how Bridgement works on our website and our blog. And hey, take your time. Just because our funding solutions are lightning-fast, that doesn’t mean you have to be.