Entrepreneur’s Journal: When raising capital, beware of the ‘advance fee’ scheme

06 07 2008

Entrepreneur’s Journal: When raising capital, beware of the ‘advance fee’ scheme

Posted by: in Small Business

I recently talked to a business owner who was in the process of raising capital. To this end, she paid a $20,000 upfront fee to a finder (a person who brokers equity investments and loans).

The result? Nothing. The finder stated that a variety of banks were not interested in the deal.

Oh, and that $20,000 fee? Unfortunately, that was non-refundable.

With the credit crunch — and slowing economy — entrepreneurs are certainly having trouble raising money. But, there also appears to be a rise in so-called “advance fee schemes” (this is according to a recent piece in the Wall Street Journal, which is a paid publication).

In fact, the FBI is investigating the matter (and also has some helpful resources on its website). Although it could actually be pretty tough to prove fraud. Essentially, there must be evidence that the finder had no intention of raising the capital.

So, how can you protect yourself? Here are some tips:

Verify: Do a background check on the finder, such as by using an on the internet service. Also, does the finder have a website? A real physical address - not a PO Box? Customer references?
Payment: A small upfront free is OK. However, you should really be paying for performance; that is, a solid introduction to a financing source.
Contract: Sign one and have an attorney review it.
Be wary of language like “guaranteed”: In the world of finance - especially with small businesses - there are no guarantees. Simply put, raising capital is extremely tough. So, don’t get sucked into grandiose promises.

Then again, you must ask yourself: why do you need a finder anyway? After all, if your business is credit-worthy, why can’t you go directly to the bank? Hey, many business owners do this successfully, right?

Perhaps a better approach is to hire an expert to help fill out the loan documents and prepare a business plan. For such services, the fees can range from $1,000 to $10,000 or so (again, make sure you do a background check and don’t pay the full amount upfront).

Or, on the other hand, you can craft your own business plan. And the good news is that there are several books on the topic - such as Mike McKeever’s How to Write a Business Plan - as well as software, like Palo Alto’s Business Plan Pro.