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SCAMS TARGETING SMALL BUSINESSES
by: Cary Christian


It's quite common to hear about scams aimed at home businesses. They're everywhere you look online and it has made home business owners very wary. But other than credit card fraud, small businesses are not targeted by scam artists nearly as often.

Lately I've seen a lot more of one particular type of scam that might have your small business squarely in the crosshairs. This scam usually targets either small businesses that are successful but need an infusion of cash to grow or it targets small businesses that are in trouble and need cash to survive. Let's look at each type and what you need to do to protect yourself from them.


CASH FOR GROWTH

Let me tell you a story to illustrate how this scam works.

A few years ago Bill at XYZ, Inc. came up with an idea that was unique and that would allow him to quickly take his company from a strictly local enterprise to the national level. The company was doing very well, but being in a service industry, the company had little in the way of hard assets that could be used as collateral for a bank loan. Bill did check with his bank just for grins, but as he thought, they were unwilling to loan him anywhere near the funds he required.

But Bill didn't worry because he knew he was in a perfect position to attract equity venture capital. He had a solid business, great track record, was well-respected in his industry, and had a concept that could literally revolutionize the way his services were delivered.

Bill prepared a business plan and started investigating venture capital firms. He felt that most of the better-known firms were too big to be interested in his ideas so he began looking into firms that were smaller but seemed to target businesses the size of XYZ, Inc.

He joined several sites on the Internet that purport to bring entrepreneurs and venture capitalists together and entered summarized information regarding his business and the amount of capital he needed to raise. He began to receive requests for more information and happily provided it.

Then one day Bill received a call that he thought would change his life. One of the venture capitalists called (we'll call him "VC") and asked him to fly out west for a sit down meeting. Bill made the trip, met the man who could make his dreams come true, and came back home believing he was on his way.

Over the course of the next few months, VC worked with Bill to improve the business plan and refine the funding needs of the business. VC convinced Bill he needed quite a bit more capital than he originally thought. They discussed the structure of the business in detail and drafted a joint venture agreement with a company that specialized in acquiring investments from European investor groups.

Bill was exceptionally happy with the terms of the investment and structure of the deal with the overseas investors. The paperwork was in place, a letter of agreement had been signed, and they were ready to roll. The only thing left for Bill to do was cut a check for $10,000 to cover his small share of the $150,000 in organization costs of the new enterprise.

Yes, you guessed right. The entire elaborate process of putting this deal together was for no other purpose than to fleece Bill out of $10,000!

Think about it: Bill did all the work. All VC did was keep him working and headed down the right path. At the same time he was working Bill, he was working seven or eight other people in the same manner. On average, about 50 percent of VC's marks will complete the process, earning him a quick $40,000 to $50,000 for a few months of very light work.


WHERE DID BILL GO WRONG?

First of all, Bill assumed that the larger, well-known venture capital firms would have no interest in his business just because it was small. Venture capitalists, if you can obtain an audience with them, are impressed with vision and people who have a track record of getting things done. Bill had both.

Second, Bill got deeply involved with VC without checking him out first. Bill WANTED to believe that VC had the answer. VC counted on this and worked Bill very slowly and carefully to build credibility and trust that would eventually make Bill think checking up on VC wasn't necessary.

If VC had come in like a whirlwind, compressed the process into a 30-day affair and hit Bill up for $10,000 right away, alarms would have sounded in Bill's head. VC knew better. He was prepared to spend months building credibility and trust without ever mentioning a cash requirement on Bill's part.

Bill should not have believed anything that could not be independently verified. Bill should have insisted on references, and once he obtained them, maybe even make a visit to the business sites of the referring individuals just to make sure they were real companies.

Bill should have also insisted on meeting with the representative of the foreign investors as well. In this case, the representative was just another con man who worked with VC, but by meeting him Bill would have had a better chance of recognizing what was happening.

WARNING! This type of scam can be very difficult to identify. A good con man will have the process impeccably organized and designed to look and feel exactly like such a transaction should. It will appear to be very real unless you really start digging in and peeling back the layers.


WHAT RECOURSE DOES BILL HAVE?

VC didn't just disappear with Bill's cash. Rather, he came up with excuses for why the foreign investors were having trouble raising the capital. VC specifically chose to tell Bill the money was being raised overseas because it gave him a variety of excuses to use on Bill. Examples could be problems with currency fluctuations or sudden problems with the economy in the country or countries where the money was being raised.

Eventually, Bill realizes that he's been had. But can he prove it? The bottom line is that it would be very difficult and would probably cost a lot more than $10,000 to do so.


CASH FOR TROUBLED BUSINESSES

At least Bill still had a viable business that was in good fiscal health. There are many businesses in deep trouble that are looking for a capital infusion just to survive. There are hundreds of scumbags just waiting for the opportunity to "help" them.

The same scam VC ran on Bill could be run on this type of company as well, but it usually isn't. Troubled companies need cash fast, are more desperate, and do not require much stroking. More frequently, troubled businesses are approached by "loan brokers" who claim to specialize in finding this type of funding. Their marks are desperate so they don't wait to hit them up for money. They'll charge anywhere from $2,500 to $10,000 up front to put the paperwork together and submit it to the "lenders they normally work with."

Of course, none of these loans are ever approved. In many, if not most, cases, the scam artist will find a way to blame the inability to obtain funding on something the borrower did wrong that made it impossible to sell the deal. In some cases, the scam artist just disappears with the money and doesn't even go through the charade of submitting a package to lenders.

No matter how desperate the situation, never do business with one of these "brokers" unless you can verify everything they say and you can verify their references. Additionally, most legitimate brokers will not charge you a fee up front. They'll take a commission once they find the funding for you. This is as it should be.


WHAT TO DO IF YOU ARE VICTIMIZED

If the scam involves loan transactions, state banking agencies will take a healthy interest in them. In fact, regardless of the form of the scam, there will be some state or federal agency that wants to hear about it. So if you or someone you know are ever victimized in this type of transaction, don't hesitate to report it. Scam artists flourish because they count on people being too embarrassed to report them. If presented with the opportunity, please swallow your pride and help put these people where they belong. In jail.


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