Sunday, September 21, 2008

#10. Business and loan company scams.

Scam artists use the victim’s desire to improve his or her lifestyle by offering “business opportunities” or “advance fee loan” scams.

It was very hard for Peggy to get away from home. She tended her two small granddaughters during the day and was usually so tired by the evening that she didn’t feel like going out. She did wish that she could earn a little extra money to help pay expenses. One day, while looking through a magazine, she noticed a small ad: “Earn extra money at home.” She looked closer. “No experience required, all materials supplied.” The ad listed an email address and an out-of-state post office box. Peggy wrote a letter requesting information and shortly thereafter she received a large envelope in the mail. The envelope described a home mailing business and included charts showing how much money she could make each week by processing envelopes for companies in her area. Peggy decided that here was something she could do and still watch the children.

After reading all of the materials, Peggy filled out the application. The application said she needed to pay a $50 application fee. Peggy really didn’t have that much money to waste, but the materials said she could easily make the money back in less than a week. Peggy sent in the money and the application the next day. She waited every day for the materials. About two weeks later, she received a package in the mail. The materials contained an explanation about the envelope stuffing business and some sample advertising. There was a price sheet with a list of “additional items suggested for use in the business.” Peggy opened the book about the envelope stuffing business. The first thing it said to do was to contact businesses in her area to see if they needed an envelope stuffing service. Peggy never did figure out that she was the victim of a scam.

Elements of the business opportunity scam:

  • Promises of high returns or earnings with little or no work.
  • Application or processing fees charged for explanatory materials.
  • Suspect categories of business opportunities typically include vending machines, amusement games, pay telephones, display racks, CD-ROM computer software, and other similar activities.
  • Uses out-of-state post office box address, 800-number, or email address.

Sometimes it is difficult for professional to determine whether a business opportunity is real or a scam. To the right person, a business idea can be worth a lot of money. There are many legitimate opportunities for people to work in their homes. Service businesses, mail-order businesses, computer design and desktop publishing, many more activities, can be built into profitable home businesses. The important thing to remember about any business opportunity is that it is a business. All small businesses require a great deal of time and dedication to be successful. Even legitimate ads seldom emphasize the tremendous amount of effort that is necessary to be successful. Either unique products or unique skills can become the basis for a profitable business. The best place to begin your investigation of small business opportunities is your local public library. You can also consult your local community college or university campus for additional information about beginning a home business. Other resources include government agencies, including the Small Business Administration.

Although legitimate business opportunities may advertise in newspapers and magazines, many scams are also included. Exercise extreme caution if the ad contains little more than an “800” number and promises of high returns. Do not assume that because the ad appears in a major newspaper or magazine it has been checked for accuracy.

No matter what type of business opportunity you are interested in, you should become acquainted with the business before you spend any money. Is important to obtain a detailed description of exactly what kind of work is required. Peggy, in the example above, was looking for a job she could do entirely at home. If she had investigated the envelope stuffing business she would have found that she needed to go out to businesses in her area to solicit work. Because she was unable to do this, no matter how much material she had received, she would have been unable to do the work. Business opportunity and franchise promoters are required to provide you with disclosure documents before you sign any contract or pay any fees. This disclosure document should contain sections on risks, necessary business experience, background information concerning the company and its directors, any history of lawsuits against the offering company, a detailed explanation of any fees and conditions under which they will be paid, audited financial statements containing information for at least the past three years, and substantiation of any earnings claims.

Most states and cities require some type of business registration. If you live in a city there may be restrictions on the type of business you can do in your home. Often cities do not allow inventory-type businesses in residential areas, especially if the business requires deliveries in trucks.

Many times the promised materials either never arrive or are useless. In some instances, scam artists sell nonexistent “franchises” for hundreds or thousands of dollars. In every case the loss could be avoided if the potential victim would spend time investigating the business opportunity. One of the best ways to investigate is to ask for references and then go and see the business in operation. If you merely talk to the references, you could be talking to one of the scam artist’s confederates sometimes known as “singers,” or individuals who provide phony testimonials. If the business involves retail locations, take the time to visit locations where the business is actually in operation. Interview at least five or six references. Ask them specific questions about the business and the support received from the promoter. Ask specific questions about their income and whether it lived up to their expectations. Also ask them what they like and dislike about the business opportunity.

Seek professional help. Don’t lose thousands of dollars because you’re unwilling to spend a few hundred dollars talking to an accountant or lawyer. If you consult a professional, listen to what they say and follow the advice you receive. Remember that a scam artist will promise practically anything to get you to invest.

The number of new businesses that succeed in staying in business for more than one year is very small. If you’re involved with a scam there’s no possibility of success no matter how hard you work.

Protect yourself by:

  • Investigating thoroughly any potential business opportunity.
  • Asking for references where you can actually observe the business in operation and watching out for “singers.”
  • Obtaining a detailed description of the work required to make the business operate.
  • Talking to the Better Business Bureau and local government agencies about the type of business involved.
  • Checking the public library or the Internet for information about the business.
  • Checking compliance with state and local laws and obtaining any necessary licenses.
  • Interviewing five or six references.
  • Getting professional help and advice.
  • Remembering that a scam artist will promise practically anything to get you to invest.
  • Making sure that you can operate the type of business you’re interested in from your home without violating any zoning restrictions or ordinances.

Another type of scam involves loans for which the person must pay an advance fee of some kind.

Bill had his eye on a new bass fishing boat. Unfortunately, he lived on a very strict budget. The company he worked for had shut down the plant in his hometown and since he was close to retirement, he was unable to get a new job. Although he had worked for many years his pension was not large and he relied on Social Security to make up the difference. One day he received a postcard advertising a low interest loan. The card said that if he called the number they could qualify him over the phone.

Bill called the number on the card was told that within a few minutes he could qualify for a loan. The man on the phone told him that there was a fee, but the loan was guaranteed. The man asked him several questions about his work history and financial situation. He told Bill to wait a few minutes and he would have an answer. When he came back on the line he congratulated Bill on qualifying for the loan and told him that there was a $100 origination fee. Bill was instructed to have an overnight mail pick-up would arrive at his home that afternoon and that the company would pay to have his check sent overnight. The man told him he would receive the loan about a week after they received the check. After two weeks Bill tried to call the number back. The number had been disconnected. It was some time before he realized he had been scammed.

Elements of the advanced fee loan scam

  • An offer of guaranteed credit for the payment of a fee.
  • Loans offered at a below-market interest rate.
  • Very quick or instant loan qualification.
  • The requirement that the loan fee be paid immediately.
  • The transaction is conducted entirely over the telephone.
  • Advertisements for loan services made by telemarketing or direct-mail advertising.

It is common for loan institutions, including banks, to charge a loan processing fee, or application fee. This fee is charged to cover the costs of qualifying you for a loan, and obtaining credit information. The difference between legitimate businesses and scams is that the advance fee loans schemes claim that the fee will “guarantee the loan will be made.” A guarantee or promise of qualification for a loan can signal a potential scam, especially if the company is willing to send a runner to pick up your check or pay for overnight delivery. Many of these companies also advertise that they can obtain a loan for you, even if you have bad credit or no credit

Legitimate loan companies do not guarantee loans. In some states, assessing or collecting an advanced fee for loan is a crime, although some businesses such as banks and credit unions are exempt from this prohibition. Before paying a fee to obtain a loan, make sure you are dealing with a legitimate loan company. Banks, credit unions, and loan companies are highly regulated and information concerning legitimate companies should be available from your state banking department or attorney general’s office

Protect yourself by:

  • Verifying the status of any loan company with which you are not familiar with the state banking department or attorney general’s office.
  • Realizing that a legitimate loan institution will not “guarantee” the receipt of a loan.
  • Realizing that legitimate financial institutions cannot risk qualifying you for loan without researching your credit history.

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