Avoiding Small Business Grant and Loan Scams

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Small business owners should be wary when it comes to unsolicited promises for financing, especially when they come from what seem to be governmental institutions. An increase in reports of scams targeting would be entrepreneurs is exploiting a general lack of knowledge about who is able to obtain grants in order to hoodwink people into paying fees for a supposed payout in the form of a grant. The scheme targets business owners and those who would like to start a business, using the letterhead of the Small Business Development Center and stating that after an initial deposit of $24,500, a payout of $280,000 in the form of a grant would be given to the victim. Many small business owners and those who would like to start a business don’t fully understand the differences between grants and small business loans, and therefore are susceptible to schemes impersonating government organizations including the SBA. Here are some facts about grants that can help small business owners avoid falling for these types of schemes by educating them on what is simply too good to be true.

Grants are competitive. Federal grants are not simply given out to small businesses, on the contrary, small businesses typically have to apply for grants after writing a proposal, often with the help of a professional grant writer. The idea that a government organization would contact a business and offer them a grant without solicitation should be met with immediate skepticism.

For profit businesses are usually not eligible. While there are programs that exist that can help small businesses, especially those with female or minority leadership, in general no matter how much your small business does for your community or what type of demographic it falls into, if it is a for profit business that is not engaged in medical research the odds that it can apply for a Federal grant are slim to none. Small business loans are even difficult to apply for for many business owners, many of whom are turning to alternative funding sources during the government shutdown. The idea that the government has randomly selected you to give you money when there are many small businesses that can’t even get a loan from a traditional bank should raise a red flag.

Grants are not the same as business loans. A grant is usually not paid back, rather it is a investment in the important work of the organization or individual who receives it. On the other hand, a loan is paid back, with interest. If a letter is using the words loan and grant interchangeably, it is a good sign that all is not well. A legitimate financial institution should be able to differentiate between various forms of financing, especially when the differences between them are as important as the difference between free money and paying back more than you were given.

Some other things to check in the event that you receive an unsolicited offer for funding are the addresses on the envelopes and concerning the agency that is supposedly being represented, whether or not the agency is requesting any sensitive information including your bank account information or your social security number. Pay attention ad do your homework surrounding these types of notices. It is far more likely that you will be able to identify a scam if you take a little time to think about the offers you are getting as opposed to rushing to comply with whatever the instructions you’ve received are telling you to do.

Photo Credit to Simon Doggett on Flickr

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