Fraudulent funders = big woes for small businesses

At some point in running your small business or organization, you may need financing to grow or keep things running. That’s a need very much on business owners’ minds right now. But, as you explore financing options, be mindful: Some financing companies lie about their terms, break the law, use terrible debt collection practices, and leave businesses in worse financial conditions than before.

In a lawsuit announced today, the FTC says Richmond Capital offered financing to small businesses, non-profits, and religious organizations, promising they could get a specific amount of money, in exchange for a promise to repay a higher amount from business revenues. Ads for these financing products promised no personal guaranty or up-front costs — but, according to the FTC, Richmond Capital’s promises were false. Instead, says the FTC, people got far less money than they were promised, had to agree to personal guarantees, and paid big up-front fees. And that’s just for starters.

People also signed a legal document called a confession of judgment. This document let Richmond Capital go to court and get a judgment — without any objection or response from the person — if they stopped paying or breached certain provisions of the contract. But according to the complaint, Richmond Capital used these confessions of judgment to go after people’s assets in circumstances not permitted by their financing agreements. What’s worse, Richmond Capital allegedly threatened violence when people didn’t pay. The FTC asked the court to make Richmond Capital stop these practices and refund people’s money.

Small business is an important engine in the US economy. But small companies and organizations can be big business for deceptive funders and outright scammers. So before you get financing:

• Read the contract. If there’s anything you don’t understand, ask. Then get the answer in writing.
• Find out what the consequences will be if you can’t make payments on time.
• Check out funding options for your business at the Small Business Administration’s website.
• Learn to avoid small business scams at FTC’s Small Business website.
• Tell the FTC about any dishonest practices you experience.