7 red flags when meeting with a lender
Borrowing money can be stressful, but sometimes small timeframes or confusing guidelines means it’s especially difficult to sort out what is normal and what is not.
Understanding the basics of the process can help you catch if something is off. But even then, if all of these boxes are checked, there might be funny issues within a lender’s process. Read ahead to learn about seven red flags when dealing with a lender.
7 Red Flags
1. Rushing through the process
This red flag might show as a short time frame where you need to sign all the documents immediately. If a lender is telling you that they need you to fill out the forms and sign everything within 24 hours, they don’t have your best interests in mind. When thousands of dollars are on the line, you should never have to rush.
Even if they push you to sign or contact your bank within a certain time frame, run. Preparing everything you need can take time—especially when dealing with financial institutions. Generally it takes up to seven days to get approval after applying and then another seven days for the money to come through. If someone is promising you a two day turnaround for the entire process, definitely take it as a sign to look deeper into this lender. There are some lenders who do offer 24-hour approvals, like Lendio for instance. But those are far and few between.
2. Not doing a credit check
Generally, before lenders even give you rates, they will do a credit check and make sure you’re a reliable borrower. A credit score shows if you pay your bills on time and consistently. It tells a lender that you’re a good investment and that you are also a good risk.
If they do things above the line, they’ll need your credit score to justify the loan. If they blow off the credit check, it means they don’t hold themselves accountable. They are not justifying the loan. Something is not right. It could be a myriad of things. Either way, this is a major red flag. Find another lender.
Of course, before even going through this process, you can definitely check your own score whenever you want, but there are consequences to checking too frequently. Just like that, there are strange rules and nuances when trying to get that information for yourself, use this guide on how to check your business credit score and you will be able to sort through the warnings and figure out where you stand in terms of credit and how to get an even higher score if needed.
3. Making unreasonable promises
It’s not good if the lender tells you a loan is a no risk transaction, you’ll have zero interest, or the payments will eventually just disappear with refinancing. If you feel manipulated or that only this specific lender can make it turn out well for you, something is very wrong.
Considering this is a business transaction, remember that this exchange must also be a good deal for the lender as much as it is for you. If that balance is way off and they seem to be losing money on the deal, they’re not telling you the full story. Run and find another lender.
4. Lacking transparency
There are few different ways lenders might fail to give you up-front information:
- They won’t show you an amortization schedule or loan terms
The amortization schedule and loan terms are the documentation that breaks down how the interest on your loan will accrue, the timeline of payments, and how they will change depending on the loan you agreed on—and any other fees necessary to fulfill the exchange.
You have a right to these documents and to knowing this information before signing on that loan. You have a right to understand these terms before agreeing to them.
- They won’t answer your questions directly
This point ties into the previous, but you should not trust a lender who cannot be direct with you when you ask questions. It’s fine for a lender to say, “I don’t know, but I can get you that information after I speak with my manager.” That’s totally okay.
What is not okay is if a lender just avoids the question and tries to distract you from what you are asking. This is your money. This is your credit score. This is your life. You deserve to know what is happening and work with people who can be direct and straightforward with your issues.
- Their website isn’t secure
They should have the basics of a trustworthy website. Take a look at these examples. If they don’t have a secure rating, buttons don’t lead anywhere, or there is not a way to contact the lender or even an address listed, this is not safe.
5. Pushing you to borrow more money than necessary
This goes back to a lender protecting themself. If a lender is being wise, they will not throw money at you. They will lend you exactly what you need, anticipating you paying it back with interest.
If a lender is pushing you to borrow much more money than you actually need, this is foolish. They could be trying to trap you. It’s not in your best interest to be paying interest rates (excuse the pun) on larger amounts of money than necessary.
6. Requiring high fees
This could include high closing fees or really high interest rates. It’s not difficult to figure out what the average interest rates are, in fact we have an article that lays it out for you, What Is the Average Business Loan Interest Rate?
If you are being asked to pay much more and you do have a reasonably good credit score, find a different lender.
7. Loan flipping
Loan flipping is when you refinance your loan repeatedly. If a lender is pressuring you to do this, there is something wrong. Of course, refinancing can help you get a lower interest rate, but if the lender keeps asking you to refinance your loan over and over again, that’s sketchy. You might end up with a higher interest rate when all is said and done.
If it sounds like refinancing multiple times is the only way to get you a good loan, go find another lender. Something is wrong.
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Even if you’re still learning about the best loans, you can keep an eye out for these red flags, like being rushed through the process or not given clear answers you can understand.
The money business is a serious business and it is critical to make good moves especially when you are borrowing and paying interest.
Want some ideas for your best small business loan pick? Check out our favorite small business loans.
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