Quick answer
Red flags in a business loan include requests for fees before approval, pressure to sign immediately, costs not stated in writing, guaranteed approval claims, security or guarantees wider than the loan needs, unclear early payout terms, repayment schedules that do not fit your cash flow, and contracts that differ from what you were told. Any one of these is a reason to slow down and ask questions.
Key points
- Upfront fees before approval and guaranteed approval are serious warning signs.
- Pressure to sign quickly removes your chance to review.
- Every cost should be in writing before you sign.
- Security and guarantees should be proportionate to the loan.
Checklist
- No fees requested before an approval
- Time given to read and seek advice
- Total repayable and every fee in writing
- Security proportionate to the loan
- Clear early payout calculation
- Contract matches what was discussed
Most business lenders are legitimate and most offers are fair, if sometimes expensive. But business owners under pressure are an attractive target for poor lending practices and outright scams, and the warning signs are often visible to anyone who knows what to look for. This list is part of our loan offer review series. If you spot any of these, stop and ask questions before going further.
Red flags about the lender
1. Fees before approval. Being asked to pay a significant fee to “secure”, “unlock” or “insure” an approval before you have a formal offer is one of the most common features of loan scams. Legitimate fees are disclosed in writing and are usually deducted from the loan or paid at settlement.
2. Guaranteed approval. No responsible lender can guarantee approval before assessing your situation. The phrase is a marketing hook, and sometimes a trap.
3. Unclear identity. You cannot find the lender’s full company name, ABN or ACN, or physical address, or the entity on the contract is different from the one you have been dealing with. Check names and numbers carefully; the ASIC website explains how to search company registers.
4. Unusual payment requests. Requests to pay fees by gift cards, cryptocurrency, international transfers or to a personal account. Legitimate lenders do not operate this way.
Red flags about the process
5. Pressure to sign today. “This offer expires at five o’clock” leaves no time to read, compare or get advice. A fair offer will survive a day of consideration.
6. Discouraging advice. A lender who discourages you from showing the documents to your accountant or lawyer is protecting the lender, not you.
7. Verbal promises that are not in the contract. If you were told there is no early repayment fee, or that the guarantee is limited, but the contract says otherwise, the contract wins.
Red flags in the offer itself
8. Costs not in writing. You should be able to see the total of all repayments and every fee before signing. If you cannot, do not sign. Use the true cost calculator to check what you are given.
9. Security wider than the loan. A small unsecured loan that comes with a mortgage over your home, or guarantees from family members who are not involved in the business, deserves a hard look. Security should be proportionate. Read about security and GSAs.
10. Repayments that do not fit your cash flow. Daily debits for a business paid monthly, or repayments that only work in your best month, are a recipe for default. Test them against your worst month.
11. Punitive payout terms. Some contracts make early repayment very expensive or calculate payout in a way that removes any saving. Ask for a worked example. Our guide to payout figures explains what to ask.
12. Broad default triggers. Contracts that let the lender declare a default for vague reasons, such as a “material adverse change” with no definition, or for minor administrative breaches, increase your risk. Read the default section carefully; our guide to reading a loan contract explains common clauses.
Pressure points that make owners vulnerable
Owners are most likely to overlook red flags when they are under pressure: an ATO deadline, wages due, a supplier threatening to stop deliveries. That is exactly when it pays to slow down for an hour, read the documents and ask questions. A loan taken in a panic can turn a short-term problem into a long-term one.
What to do if you spot a red flag
- Ask the lender to explain, in writing.
- Request the full contract and all fees before paying anything.
- Check the lender’s company details independently.
- Get your accountant or a lawyer to look at the documents.
- If something feels like a scam, stop, do not pay, and report it to Scamwatch.
Expensive is not the same as dodgy
A high-cost loan is not automatically a bad one. Short-term and specialist finance can be expensive for legitimate reasons. The question is whether the cost is clearly disclosed, whether you understand what you are agreeing to and whether the loan genuinely solves your problem. Use the offer comparison calculator to see how an offer compares with alternatives.
An illustrative example
A made-up builder facing an ATO deadline receives an unsolicited email promising guaranteed approval for an unsecured loan, subject to an “insurance bond” paid by international transfer. The builder checks the company name, finds no matching registration, and notices the email domain does not match the website. He does not pay, reports the email and instead arranges a property-secured loan through a lender he can verify.
Want a second opinion on an offer?
If something about an offer does not sit right, a second opinion can help. Make one enquiry and a real person will look at your situation. There is no credit check when you first enquire, and your details go to one lending partner rather than a list. Describe the offer you have and what concerns you in your enquiry; it is a good way to see whether there is a clearer alternative.
Frequently asked questions
Is it normal to pay a fee before a business loan is approved?
Some legitimate lenders charge application or valuation fees, but these should be clearly disclosed and reasonable. Requests for large upfront fees to secure an approval, especially by unusual payment methods, are a common feature of scams.
What should I do if a lender pressures me to sign today?
Slow down. A reasonable offer will still be reasonable tomorrow. Ask for the documents in writing, take time to read them and get advice if needed. If the offer disappears because you asked for a day, that tells you something.
How can I check a lender is legitimate?
Confirm the lender's company name and ABN or ACN, check they appear on official registers, look for a physical address and clear contact details, and make sure the contract names the same entity you have been dealing with.
What if the contract is different from the quote?
Ask the lender to explain each difference and issue a corrected offer if needed. The signed contract is what applies, not verbal assurances.
Where can I report a suspected scam?
Scams can be reported to Scamwatch, run by the National Anti-Scam Centre within the ACCC. If you have lost money, contact your bank immediately.
Sources and further reading
We are an information site, so we do not rank lenders, publish interest rates or accept payment to feature a product. Every page is written and checked by our editorial team against official sources. Read our editorial policy and how we are funded.
