Protecting Your Business From Lending Fraud5 min read

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Executive Summary

Lending fraud is a serious threat to small businesses. Knowing how to protect your business and thwart scammers can avoid the costly consequences of small business fraud.

Reports of fraud in the media tend to focus on data breaches at big companies and threats to individual consumers. Often overlooked is small business fraud, which takes a costly toll on companies and the economy as a whole. 

Small business fraud is not always reported, so determining its total impact is challenging. The Better Business Bureau (BBB) estimates that small businesses suffer a seven billion dollar annual loss from fraud, even without counting indirect costs to their reputation or customer loyalty. Other reports place the costs of identity theft alone at nearly $17 billion in 2019.

Small businesses regularly depend on loans, credit, and other types of financing, so lending fraud is a prime target for thieves. Financial institutions say the problem is getting worse, with more frequent fraud attempts that may be harder to detect because of the complexity of small business lending. 

Proactively protecting your business from lending fraud can avert potentially devastating consequences. Knowing about the types of fraud and scammers’ tactics enables small-and medium-sized enterprises (SMEs) to defend their assets and reputations.

What is Lending Fraud? 

Lending fraud is a way of using deceit and manipulation to get access to funds from loans, credit cards, and lines of credit. 

There are multiple types of lending fraud, and thieves regularly devise new schemes and tactics. The most well-known scams include identity theft, account takeover, and deceptive offers. 

Identity Theft

Even though it gets more attention among consumers, identity theft is a key type of business fraud. In fact, when deployed to commit lending fraud, identity theft becomes more sophisticated and costly. 

To conduct these operations, thieves acquire personally identifying information about a business and its owners and then use their identity to apply for new loans, lines of credit, or credit cards. Specific ways that identity theft can be used to commit lending fraud include: 

  • Never pay scheme: This is when thieves use the stolen identity to apply for and receive a loan that they will never make any payment on. 
  • Commercial bust-out: In this scheme, thieves open a number of loans or lines of credit. Unlike the “never pay” scheme, they actually start off making payments in order to create a credit history. Then, taking advantage of that history to increase credit limits, they draw out the maximum amount of funds and disappear. 
  • Shell companies: Criminals may use identifying information to set up shell companies that can secure financing, letting them walk away with the money with limited traceability. 

In some cases, thieves don’t assume a stolen identity outright. Instead, they may create “synthetic identities” that are fake but have enough coopted identifying information to make them appear real. 

Account Takeover

As the name implies, account takeover involves capturing control of a business’s financial accounts, allowing thieves to withdraw funds or borrow against a company’s lines of credit. Account takeover can happen when thieves seize sensitive information like passwords or are otherwise able to hack into accounts. 

Because account takeover takes advantage of existing client accounts, it has become popular among criminals who want to avoid identity theft detection programs applied to applications for new loans or credit. 

Deceptive Offers 

In these schemes, thieves may pretend to be a bank or government agency that offers an appealing new loan or grant. To apply, though, they demand up-front payment. 

Other deceptive offers include enticing deals to lower fees on equipment leases or credit card processing. These offers are designed to get a business owner to sign a vague or incomplete contract that is later modified against their interests. Fraudulent lenders may use similar tactics to scam small businesses. 

Key Tactics of Fraudsters and Scammers

Despite the exact type of scam, criminals tend to rely on certain tricks of the trade that small businesses should watch out for

  • Misrepresenting themselves as someone you trust
  • Creating a sense of urgency to encourage you to act without thinking things through
  • Requiring hard-to-trace forms of payment such as wire transfers or reloadable credit or gift cards

In lending fraud, more thieves are turning their focus to mobile devices. Financial institutions have made it easier than ever for businesses to manage accounts through smartphone apps. At the same time, many people let down their guard on their phone, such as by using unsecured public WiFi or employing a weak PIN to access their phone and, in effect, their mobile apps. 

How to Protect Yourself

While criminals can be sophisticated, there are important steps that small business owners can take to protect against fraud. 

  • Be skeptical. If an offer sounds too good to be true, it could be a sign of a scam. Be especially wary if you are told that you have to act fast, pay up-front, or use unconventional payment methods. 
  • Follow cybersecurity best practices. Use strong passwords, don’t ever send them via email or messaging, and limit access to financial data. Make sure that your data security measures account for mobile devices, including any personal phones that are used for business activity. 
  • Stay on guard against phishing. Criminals can misrepresent who they are, including through spoofed phone numbers, email accounts, or even ID cards. Strict norms against sharing information can prevent employees from divulging sensitive information. 
  • Ask your lender about fraud protection. With existing lenders or ones you may work with in the future, ask about identity verification and other tools they use to protect customers against fraud. 
  • Regularly review bank accounts, credit activity, and invoices. Develop a process through which you check your financial information frequently so that you will quickly notice if something is amiss. 
  • Ask questions, take your time, and get everything in writing.  Bringing up questions, reflecting on the information, and asking for everything in writing can thwart the tactics of scammers.  

It’s important for small business owners to talk with their employees to make sure that everyone knows the risks of fraud and has these principles in mind to avoid inadvertently helping thieves. 

Finally, small businesses should have a plan in case they are targeted. This includes knowing who to contact at your bank or lender and reaching out to them as soon as possible. Fraud and attempted fraud should be reported to the Federal Trade Commission and/or your state’s attorney general.

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