Financing scams hit small business

By Steve Garmhausen

As small business lending continues in the doldrums, the criminals that have long preyed on consumers with advance-fee loan scams are turning their sights on entrepreneurs desperate to finance their ventures.

Michael Bernardo, chief of the Federal Deposit Insurance Corp.’s cyber-fraud and financial crimes section, says he’s seen the scams surface in the small business world in the past six months or so, though the trend hasn’t attracted much attention because small business owners rarely report it.

In an advance-fee loan scam, someone posing as a loan broker promises to deliver a loan in exchange for an upfront fee. The fee and the criminal disappear—and the loan, of course, never materializes. In the small business twist, says Mr. Bernardo, the scammers often claim to have private equity funding sources.

Bogus bankers

This is exactly the claim that a shady middleman made to Steven Ancona, president of Flatiron Real Estate Advisors.

Last October, Mr. Ancona, who has been seeking funding for a green hotel project, was approached by an unfamiliar group offering a multimillion-dollar construction loan. As a favor, he asked a friend who works in finance to look into the matter. Good thing he did. Nicole Perrotta asked around at the large brokerage house where she works as a financial adviser and discovered that “this particular group certainly was a scam.”

“Had [Mr. Ancona] gone along with what was being proposed,” says Ms. Perrotta, “he would have paid the scammers a sizable sum of money in return for the financing of his project, which never would have happened.”

Neither Ms. Perrotta nor Mr. Ancona made an official report about the approach, though Ms. Perrotta mentioned the group to a friend of hers at the Federal Reserve.

“I wasn’t actually robbed, so I didn’t expect the authorities to do much,” Mr. Ancona says.

It’s hard to say how often such lending scams work. But they surely do—Ms. Perrotta discovered that the group targeting Mr. Ancona had successfully scammed other businesses out of hundreds of thousands of dollars in deposits.

The fraudsters can take other forms. Leslie Jacobs, a professional home organizer in New Britain, Conn., recently got a spate of phone calls from a self-described representative of the “federal government,” offering a $250,000 loan.

“I thought it was really great the federal government wanted to give me money,” she says with a laugh. “Then I realized it was probably a scam.”

Mukang Cho, managing principal at Crown Street Capital, says the real estate firm passed on a $35 million loan offer in spring 2008, only because it got a better deal elsewhere. Shortly afterward, he learned that the lending group had disbanded and was likely a Ponzi scheme.

Even if entrepreneurs feel a lender is shady, they can will away their doubts, warns Ken Springer, a former FBI agent who is founder of private investigation firm Corporate Resolutions Inc.

“When people are desperate, they take desperate measures,” he says. “They hope this will be their white knight.”