Breadcrumb

The Most Common Frauds in Small Business

Written by

The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedAug 20213 min read

Small business owners often believe that fraud is only something that happens to bigger companies. Yet businesses of any size can be vulnerable to fraudsters, both internal and external. If you’re wondering how to prevent fraud in a small business, the first step is learning how to recognize it. Here are a few of the most common frauds out there, along with some handy tips to prevent them.

Online phishing attacks

Cyber security is a major issue for small businesses, who may not have dedicated teams to monitor online safety. While technology makes it easier to process online payments and retain customer details in the cloud, it also leaves you vulnerable. Phishing scams are one of the most common types of attack. You receive an email or attachment, which once opened exposes your business data to malware. This potentially compromises sensitive client information, causing both financial and reputational damage. To prevent technological fraud, use tools like IP address trackers, third-party payment processors, multi-factor authentication and data encryption.

Small business loan fraud

Accessing loans leaves small businesses open to fraudsters who may pretend to be from a legitimate bank or organization like the Small Business Administration. They’ll ask for your company’s financial details along with a deposit or fees. Small business loan fraud might spoof the SBA email address and logo, with scammers offering government-backed loans that don’t exist. If you receive suspicious emails, you can report business loan fraud to the Office of Inspector General Hotline.

Accounts payable fraud in small business

Another common scam is called “long firm” or “short firm” fraud and involves your accounts payable department. With a long firm fraud, you work with a client that orders small quantities of goods and pays invoices on time. They build trust and credit, before eventually placing a large order and disappearing without ever paying the bill. Small firm fraud is similar but happens in a shorter time frame without the build-up. To prevent this from happening, you should always ask for trade references and verify trading history.

Another example of accounts payable fraud in small business happens internally, when an employee creates fake invoices to skim money into their own accounts. They might even use a shell company to facilitate payments, taking money for goods that don’t exist.

Card and check payment frauds

If your small business operates in a brick-and-mortar setting, you’ll need to be on the lookout for common payment frauds like counterfeit bills. In the case of credit card payments, fraudsters might remove a card’s magnetic strip which forces the cashier to enter details manually. This opens the possibility of using a separate account to pay for goods. Fortunately, prevention is easy in this case. Simply verify the last four digits to ensure a match.

Payroll fraud

Much of the fraudulent activity on this list involves outside parties, but a significant percentage of small business fraud is internal. One example is payroll fraud, where an employee asks for an advance and never pays it back. They might lie about their sales figures or hours worked for a higher paycheck, or even ask a colleague to clock in and out for them when they’re not there. Be sure to put systems in place to monitor time sheets and consider using automated payroll software.

How to prevent fraud in a small business

Detecting fraud in small businesses is an ongoing process, with new scams cropping up regularly. Here are a few general tips to keep your finances safe.

Conduct annual financial audits: Scrutinize reports closely to be sure that the balance sheet and income statement match up. Audit paperwork and provide fraud training for all employees.
Put internal controls in place: Controls like business fraud training, codes of content, management reviews, and countersignature requirements can all help prevent fraud.
Make it easy to file reports: We’ve mentioned where to report business loan fraud above, but do your employees know where to report internal fraud? Provide an anonymous email address or phone line where they can make a report about red flags.
Keep an eye out for red flags: On the note about red flags, look out for employees displaying sudden changes in behavior. They might want to have complete control over a project or department, or seem to live beyond their means.

It’s tempting to believe that fraud is something that happens to other businesses, not your own. Yet detecting fraud in small business using the tips above helps you avoid becoming complacent. By putting a few safeguards in place, you’ll be able to make your company a less appealing target.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.