How to protect your business from a loan shark

Growth and cashflow are the lifeblood of any business, and borrowing is often essential for both.

For small and medium-sized businesses in the UK, there are numerous borrowing options, with various forms of support available for those looking to start a new venture or expand an existing one.

However, just as in personal finance, business owners can encounter barriers that make it difficult to access legitimate financial support. 

Some may be cautious about borrowing or prefer to explore their options before making a commitment.

While this is a sensible approach, it also exposes them to risks – including the possibility of encountering illegal lenders, commonly known as loan sharks. 

These predatory lenders often operate in the shadows, targeting vulnerable business owners with seemingly attractive and hassle-free loan offers.

But beneath the surface, they operate without regulation, often imposing very high interest rates and oppressive repayment terms. 

This could trap unsuspecting business owners in a cycle of debt that could put their livelihoods and businesses at risk.

In this article, we’ve collaborated with the Illegal Money Lending Team (IMLT) to explain what a loan shark is, why businesses need to protect themselves, and what to do if you think you’ve borrowed money from a loan shark.

What is a loan shark?

Illegal lenders prey on business owners who may be desperate for quick funding or unsure of where to turn. 

They often present themselves as friendly and approachable, offering loans with minimal paperwork and quick turnaround times.

However, once the borrower is ensnared, the lender exerts full control, dictating often unreasonable interest rates and conditions. 

Without authorisation, these lenders can use intimidation and coercion to extract payments, leaving borrowers prioritising their payments over other financial commitments.

Some warning signs of an illegal lender include:

• high-pressure sales tactics, making borrowers feel rushed or obligated to take the loan
• no clear documentation or paperwork outlining loan terms
• unclear or undisclosed interest rates and repayment conditions
• possible requests for cash payments with no receipts or records
• imposing longer-term repayment conditions than initially agreed.

For business owners in this situation, the consequences of being in debt to an illegal lender could be severe. 

They may find themselves diverting critical funds to pay off a loan shark, leaving their business unable to meet payroll, purchase supplies, or invest in growth. 

The stress of dealing with illegal lenders can also take a toll on mental health, creating a climate of fear and uncertainty.

Why are business owners at risk from loan sharks?

The UK is home to approximately 5.5 million small businesses and having access to finance is critical for them to survive and thrive.

There can be many reasons why people need to borrow for business reasons – it may be that someone needs to purchase a new vehicle for a taxi business; a builder may have suffered an injury that means he is unable to work, but he still needs to keep the business afloat; or a hairdresser may be looking to take on a new member of staff.

When the outlay is fairly small, owners may turn to informal lending sources, such as friends or family. 

However, those without these support networks they can become vulnerable to predatory lenders.

Certain businesses, such as those facing cultural or language barriers, may also be hesitant to approach traditional lenders. 

Some may lack the necessary credit history to qualify for standard loans.

How businesses can stay safe from loan sharks

Unauthorised lenders often ensure they blend into the financial landscape, making it difficult to distinguish them from legitimate lenders. 

However, there are several ways business owners can protect themselves:

1. Check their authorisation - legitimate lenders must be registered with the Financial Conduct Authority (FCA) in order to lend less than £25,000 for business purposes (or any amount to individuals). Business owners can check the FCA Financial Services Register to confirm if a lender is authorised.
2. Read the fine print - avoid any lender that refuses to provide clear documentation or written agreements detailing the terms of the loan.
3. Watch for the red flags listed above - be wary of lenders who demand cash payments, refuse to provide receipts, or use aggressive tactics to secure a loan agreement.
4. Explore safer alternatives - many legal and ethical lending options exist for small businesses, including Community Development Financial Institutions (CDFIs), government-backed loan schemes such as Start Up Loans, and grants from local authorities.

What to do if you have borrowed from a loan shark

Business owners who believe they have borrowed from an illegal lender should not hesitate to reach out to the Illegal Money Lending Team (IMLT). 

The organisation employs a dedicated team of expert investigators, financial analysts, and support staff who are ready to assist those trapped in loan shark arrangements.

The first step is contacting the IMLT, which sets the process in motion. 

Borrowers will receive tailored guidance on their options, including practical steps to manage their finances and access one-on-one support. 

The IMLT’s approach is non-judgmental - borrowers are made to feel safe discussing their situation. 

Many borrowers feel ashamed or think they are in some way to blame, but the team understands the complex factors that lead people to illegal lenders.

Once a case is reported, the IMLT financial analysts and investigators examine the details, gathering evidence to build a case against the illegal lender.

If warranted, legal action is pursued, leading to prosecution.

What is the England Illegal Money Lending Team (IMLT)?

The IMLT is a national organisation, hosted by Birmingham City Council. 

It was established over 20 years ago to investigate and prosecute illegal lenders while providing support to borrowers.

Every year, the IMLT, known as Stop Loan Sharks, helps hundreds of people escape the grip of loan sharks and regain control of their financial futures.

While many people associate loan sharks with individual borrowers, the IMLT also supports businesses that have been targeted by illegal lenders.

Some of the thousands of borrowers it has supported in the past have been business owners who have borrowed for business purposes.

Since its inception in 2014, the IMLT has successfully prosecuted 427 individuals, resulting in a combined total of 609 years of imprisonment, among other sentences such as fines, community orders, and suspended custodial terms.

What loans can the Illegal Money Lending Team investigate?

If a business has borrowed money from a lender later discovered to be unauthorised, the IMLT can step in to help. 

However, certain criteria must be met:

• The loan must be under £25,000 and used for business purposes
• The business must be structured as a sole trader, a partnership with fewer than four partners, or an unincorporated association.

Loans exceeding £25,000 for business purposes are considered exempt agreements and fall outside the IMLT’s jurisdiction and it cannot investigate loans made to limited companies.

What to do if you think your lender is illegal?

If you suspect that you or someone you know has borrowed from an unauthorised lender, it is essential to act quickly. 

The IMLT offers several ways to report illegal lending and seek assistance:

• Confidential Helpline: 0300 555 2222 (available 24/7)
• Email: [email protected]
• Website: stoploansharks.co.uk (includes a reporting form and live chat support, available Monday to Friday from 9am to 5pm).

While the England IMLT covers businesses in England, there are similar teams in Scotland, Wales, and Northern Ireland.

• to access support in Wales go to stoploansharkswales.co.uk or call 0300 123 3311
• in Scotland, go to stopillegallending.co.uk or call 0800 074 0878
• in Northern Ireland, go www.consumerline.org or call 0300 123 6262. 

By taking action, business owners can protect themselves from further exploitation and help bring illegal lenders to justice. 

Raising awareness about the dangers of loan sharks and promoting safe lending alternatives is crucial to ensuring the financial health and stability of small businesses across the UK.

What illegal money lending looks like

Paul, a 42-year-old father from Devon, needed a loan to start his business. 

His wife’s friend said that she knew a man who had a money lending company who could lend him the money he needed for the start-up. 

He took out a business loan of £20,000 to start up a clothing business. 

His business unfortunately failed and only then did Paul realise that the lending company did not have a licence. 

It was agreed that he pay the loan back through the loan shark’s bank account at a rate of £2,000 every three months. 

He received a paperwork schedule of the payments via email but did not sign any paperwork. 

When Paul struggled with repayments he was threatened, being told that his debt had been sold on and that 'they will be nasty to you’. 

He then discovered he was expected to pay an extra £4,000 in interest. 

The case was reported to the IMLT and the investigation is ongoing.