Five ways to spot and stop small-business fraud
Combatting fraud is a growing concern for small businesses, especially those with limited resources and tight margins. This guide outlines clear strategies to detect, deter, and respond to fraudulent behavior inside and outside your organization.
Takeaways for businesses
Recognizing red flags is your first defense. Monitor for mismatched contact details, suspicious financing applications, and unusual customer behavior during transactions.
Internal fraud can be the most damaging. Implement policies like background checks, surveillance, and tip lines to deter theft from within.
Anti-fraud training empowers your team. Educate employees to spot suspicious activity and update your fraud protocols regularly.
Financial monitoring helps catch issues early. Review statements and transactions closely and assign more than one person to accounting roles to ensure accountability.
Trust should never replace controls. Set consistent policies for all relationships, including risk assessments and swift responses to suspicious behavior.
Combatting fraud is especially challenging for small businesses. The financial losses, reputational damage, and other repercussions from fraud can be devastating.
Companies lose about 5% of their revenue to fraud each year, and small businesses may not have the margins to handle that loss. And if there are fewer resources to implement fraud prevention controls, issues can persist – and grow – for months before being discovered.
Fraud comes for small businesses from every direction. Hackers, malware, identity theft, and viruses can cause chaos, including loss of data and your reputation. Unscrupulous employees can use false invoicing, payroll fraud, skimming, and other means to take what isn’t theirs. And scammers from outside the company, including customers, can use false identities, forgery, fraudulent returns, and e-commerce schemes to steal from your business.
Thinking it won’t happen to your business isn’t a realistic strategy. Instead, prepare now to mitigate fraud as quickly as you find it.
Here are five ways to spot and stop fraud.
1. Watch for red flags
Fraud often comes along on the customer journey. Watch for red flags, such as email addresses that are confusing or unintelligible. Look for any mismatch between the name on the credit card, financing application, or billing information and the shipping address. If you notice an email address or name on a new financing application that’s already in your system, that’s also a red flag.
During the financing process, ensure that the applicant’s photo ID matches the name they’re using for the application and that the mailing address used in the application appears legitimate. Be wary of any discrepancy between who is receiving the merchandise and the name on the application.
2. Identify internal fraud
Fraud is often an inside job. Payroll fraud, cash theft, online banking fraud, and false invoicing are common types of internal fraud.
This type of fraud is not just a financial blow to most small businesses. The personal relationships built in small businesses can make the discovery of employee fraud and its aftermath emotionally challenging and difficult to accept.
To help prevent employee fraud and theft, the U.S. Chamber of Commerce recommends these strategies:
Improve job screening by checking references, performing background checks, and conducting your own research.
Create an anti-theft policy so it’s clear that stealing from your business won’t be tolerated.
Set checks and balances to help detect and deter fraudulent activity.
Use video surveillance to keep a watchful eye on your business and property.
Create an employee tip line for employees to report concerns without fear of punishment or retaliation.
3. Implement anti-fraud controls
Make sure every employee can recognize the signs of fraud, including unusual customer behavior and suspicious transactions. At checkout, verify that the photo ID matches the name on the application, and check for discrepancies in addresses and who is receiving a delivery. The goal is to mitigate fraud without compromising the customer’s experience.
Regularly update your policies and procedures for preventing, detecting, and reporting fraud. This could include guidelines for payments, financing applications, invoices, and more.
As an added layer of security, some small businesses implement fraud detection software and address verification systems that use algorithms to detect and flag suspicious transactions.
4. Monitor your finances
Keep a close eye on the money coming in and going out of your business. Review every bank statement and credit card bill. Scan statements and bank accounts for any red flags, including unexpected transactions and transfers. In the same way, look at invoices and payments. Was every item ordered and received?
Even in a small organization, it’s best to have more than one person responsible for bookkeeping and accounting. Simply letting employees know that there will be those checks and balances may help deter fraudulent activity.
5. Be careful with your trust
Don’t let your close relationships with customers and employees blind you to potential fraud. Implement consistent controls and policies to catch fraud, no matter where it originates. This includes periodic risk assessments, swift investigation and punishment of suspected fraud, quick remediation, and constant monitoring.
Watch for behavior red flags. Is a regular customer unexpectedly canceling orders or frequently returning items? Is an employee suddenly living beyond their means? Believe the evidence, not your biases.
Protecting your business against fraud
Spotting and stopping fraud never ends. Fraudsters never stop thinking of new ways to exploit payments, systems, and businesses. Continually updating your strategies, staying alert, and watching for red flags can help you better protect your business and build trust with your customers. Awareness, vigilance, and strong organizational controls are your best lines of defense against fraud.