I received a letter from a company that provides small business loans and financing. This company had been on my radar because of their less than stellar reputation.

How I got on this list to receive the letter, I don’t know.

Putting aside what I knew about the company, I read the letter.

It didn’t read like those over-hyped junk mail. You know, the ones with a ton of text, some of it highlighted in yellow, lots of exclamation marks, and a P.S. or two.

At the top of the letter appeared a preferred customer card. It had the same quality as a credit card. They’re trying to make it look official and gain your trust. But I get these cards all the time and shred them.

Calling attention to collateral

Collateral must be a hot button for their target audience.

The letter opens:

“We’re pleased to tell you that [your company name] has been pre-selected* for up to $150,000** in working capital — with no personal collateral required.”

Nice touch on underscoring the collateral. There’s a catch here and it’s on the back of the letter with the frequently asked questions:

“Do I need personal collateral?”

“No. Only business collateral is required.”

Sneaky.

They drill in the collateral thing again on a small piece of paper. It lists five reasons they’re a better choice for small business financing. Reason No. 2 is “no personal collateral required.”

But collateral IS required!

They think the distinction between personal and business is enough.

On the flip side of this is a worksheet for phone call notes as shown in the next image.

There’s that no personal collateral thing again! And filled in too. Notice the question does not use “personal” or “business” collateral. They have to cover their behinds, so they add “personal.”

Moving on.

Here are the footnotes aka the fine print.

• * Based on your industry, time in business, annual revenues and other business characteristics, your business was pre-selected to apply for working capital.
• ** This is an invitation to apply (applicants must satisfy certain eligibility requirements) and not an offer or commitment to provide access to capital. Restrictions apply.

What does it take to take to get small business funding?

The letter highlights what my business could get:

• $2,500 to $150,000 in working capital, per location.
• Funds sent in as little as two business days.
• A fast, easy application processes — with high approval rates.
• Freedom to use the money the best way for your business.
• Flexible solutions that are cash flow friendly.

Maybe it sounds a little too good to be true. Nonetheless, there are legitimate working capital financing services that can deliver on most or all of these. In deciding whether a small business qualifies, they look at different things than a bank does.

For example, Capital Solutions Bancorp has a fast and simple application process that can lead to funding within a few days. Before a company can request help with their accounts receivable from CSB, it must meet these requirements:

• Be in business-to-business (B2B).
• Have at least $1 million in annual revenues.

CSB is best equipped to serve businesses that satisfy those two requirements. So there’s your catch.

After reading what my business could get, the letter goes into details on how to get it.

1. Call this number and provide my preferred customer number. (This way they can quickly look up whatever data they have on my business.)
2. Find out how much my business could qualify for within 10 minutes.
3. Expect to receive funds within two days upon approval.

It was tempting to contact them to see what they’d say. However, I didn’t want to risk them getting more information and going further into their sales cycle.

Real questions that need answering

On the back is frequently asked questions. Well, they don’t answer a single question of mine.

My unanswered questions:

• What are all the fees you have?
• What’s the total I’d pay for interest and fees based on $X amount?
• How do I pay back the money?
• How do you send me the money?
• What does it take to qualify for funding?
• What will it cost me to end the financing agreement?
• What happens if I can’t pay or a default occurs?
• What penalty is there for paying back for the working capital early?

Well, the letter said they offer several solutions for cash flow to fit the needs of my business. But it’d be nice to know what those are before I contact them. I would have specific questions based on that.

Yes, I know, they want me to call and reel me in. They’re hoping to hook desperate small business owners by being vague.

Beware of using merchant capital for cash management

This company buys companies’ accounts receivable aka factoring. Unfortunately, many factoring companies like this one have added merchant cash advance (MCA) as a financing option. This is a dangerous funding practice because it can cost you a lot more money and fast. And the scariest part is that MCA can turn into an addiction.

It’s the way that the funding is structured that causes the addiction. Not because the business owner has no self-control.

“Alternative lenders offer quicker turnarounds and more personalization, but they also come with significantly higher interest rates,” Sara Ashley O’Brien wrote in CNN Money’s Non-bank loans: Quick, easy…and addictive? “And because financing amounts tend to be much smaller than those offered by traditional banks — and for shorter terms — it can lead to an endless cycle of loans.”

To help prevent getting ripped off with small business financing, do these four things:

1. Research the company and offerings.
2. Read everything and understand it. Have someone explain it to you.
3. Check all fees including upfront fees.
4. Learn about the different financing options.

Whether you come across working capital financing ad, mailing, or website, do your due diligence. This sounds like common sense. Alas, many experienced business pros don’t look into a company before making a deal. Be sure to include “[company name] complaints” and variations of that when you search.

Also check with the Better Business Bureau nearest to where the company operates as well as the national bureau.

Write down your questions before you contact them. Here are questions to ask when seeking working capital.

If you can, send those questions by email. This way you’re not roped in a live conversation. Of course, some companies may respond by telling you to call for answers. That’s a good sign to look elsewhere. Resorting to MCA won’t solve your business development challenges or support your growth strategy. You have other options.

Image credit: Remko Tanis