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Keep Your Business Safe: SME Fraud Prevention

Team 365 finance

Written by Team 365 finance

Help and Advice

Fraud is a huge issue for small businesses: in the first half of 2023, almost £600 million was stolen from SMEs in the UK. It’s crucial that both business owners and their finance teams understand the threat posed by fraudsters and do whatever they can to prevent further financial losses from fraud.

However, rapid technological advancement means there are an ever-growing number of ways to commit payment fraud, and there will always be more in the future. Businesses need to understand the technology available to criminals so they can implement their own digital defences.

In this article, we’ll define fraud in the context of modern business and technology, and examine how it might affect your company and your business. We’ll also discuss some of the more common fraud techniques to help you prepare for fraud if your business is targeted. Read on to learn more.

Defining Fraud and Fraud Prevention

Put simply, fraud occurs when a scammer lies to a business for financial gain. While the definition is simple, prevention can be quite complex, as there are a huge number of techniques a scammer may employ to commit fraud. Businesses need to be ready for anything.

When a small business is affected by fraud, it’s often not because the owners were entirely caught unaware and weren’t expecting to be targeted by criminals, but because they could not divert the necessary resources to fraud prevention. In the modern business world, prevention means implementing risk management strategies, practising due diligence, and researching data security methods.

Fraud prevention measures can be expensive and time-consuming, which means they may become a low priority — particularly considering recent poor economic conditions. However, they are well worth the investment. The financial expense related to fraud prevention measures is typically a one-off cost, while losses due to fraud can be immensely difficult to recover (if at all).

You may still be weighing the benefits of fraud prevention versus the costs. To encourage the use of fraud prevention tactics, we’ve highlighted the impact small business fraud can have on your finances, your brand, and your customers below.

How Does Fraud Affect Your Business and Your Customers?

The first, and most obvious impact of fraud is the financial cost. Losing any sum of money due to fraud can significantly disrupt your cash flow, and if you suffer from inconsistent monthly revenue or know you have a low-income month coming up, the consequences can be disastrous.

While reasonably reliable ways of recovering lost funds (such as a chargeback) exist, they only go so far in resolving the issue. Since a payment provider takes some time to process these requests, your financial issues may have worsened by the time you get the money back.

When they need to recover funds quickly, many business owners will simply increase their prices as a knee-jerk reaction. This is the most direct impact fraud might have on your customers, although it’s easily preventable by simply maintaining prices where they are. However, the lost funds will still need to be made back somehow.

Another impact fraud can have on both a business and its customers is the loss of brand reputation, and subsequent loss of customer confidence. Should your audience become aware that you’ve been defrauded in a significant way, they may no longer have faith in your business. A notable effect of this is that they would not trust your business with any of their data, which is essential to improving your products and services as a small business.

Four Common Types of Fraud and How To Prevent Them

1. Phishing

One of the most common types of fraud for both individuals and businesses, phishing scams involve a criminal sending an email or attachment that, once opened, exposes your business to malware. Customer and business data, including financial details and other sensitive information, could be compromised by this malware.

Luckily, there are a range of technical tools to help prevent phishing. Many don’t require much work on your part — something as simple as using a Gmail account for emails means you’ll have access to a fairly effective spam filter, which prevents obvious phishing attempts from arriving in your inbox.

Should the filter fail and you accidentally open a link to some kind of malware, you’ll want to make sure you have antivirus software installed. Antivirus software and firewall programmes help prevent external access to sensitive customer and business data.

However, antivirus software should be thought of as insurance against the worst case scenario. If you’re more interested in phishing prevention, it’s as simple as encouraging a healthy scepticism among your employees regarding external emails and links they don’t recognise. Consider short training courses or lectures so everyone at your business can recognise potential phishing scams.

2. Loan Fraud

Many of the types of fraud we’ll look at don’t actually involve a technological invasion of your business — most fraudsters actually find more success by targeting employees and business owners and deceiving them into willingly providing financial information.

Loan fraud is one such example. In this scam, a small business receives an email pretending to be from a reputable lender (possibly a large bank like Barclays) or from a government department offering grants to businesses. The email asks for financial information, along with a deposit or related fees, in exchange for a loan to be sent later.

Encouraging your team to think twice before believing what they read is the only way to really avoid these sorts of scams. Some emails may even use the logo or email address of the lender they’re impersonating, which makes avoiding the scam even harder. A good rule of thumb is to avoid providing your details to any small business loan provider unless you have approached them first and done significant research.

3. Accounts Payable Fraud

It’s a good idea to ensure your finance team is well aware of common scams and performs fraud reviews often to ensure the business is not being targeted. However, in 2023, only 37% of businesses reported making their accounts payable/receivable teams part of the fraud review process. This can leave a company open to scams like accounts payable fraud.

There are two common types of accounts payable fraud: long firm and short firm. In long firm fraud, a fraudster actually orders small quantities of goods from you and pays their invoices on time. In doing so, they build up trust and credit before eventually placing a large order and disappearing without ever paying the bill. In small firm fraud, there is no build-up: the criminal will simply order goods and disappear.

Companies with a B2B model, such as those that provide equipment or materials to other businesses, are commonly targeted by this scam. To prevent your team from being affected by accounts payable scams, make sure your financial teams are aware of the possibility and are on the lookout for suspicious clients. Additionally, make sure you’re asking for trade references and verifying clients’ trading history.

4. Cheque, Cash, and Payment Card Frauds

These scams are less common (especially cheque fraud) in the age of ecommerce, but brick-and-mortar retailers should still be aware of them: between 2021 and 2022, there were over 475,000 instances of card or cheque fraud recorded by the Office of National Statistics.

With cheque and cash fraud, the most obvious risk is counterfeits. Make sure any of the staff you have working the till are aware of the warning signs for counterfeit bills — large denominations, strange materials, and missing watermarks.

Payment card frauds are a little trickier to stop. The simplest version of card fraud, where the criminal uses a stolen card, is virtually undetectable by businesses if the criminal uses contactless payments. However, there are more prevention measures for online purchases: Address Verification Services compare the cardholder’s address to the billing address, which helps check for stolen cards.

3D Secure Protection can also help, and is supported by most major payment providers: if your business opts in to 3D Secure, customers will have to enter a PIN code with every purchase they make using their card. So, even if a fraudster has access to their card details, they won’t be able to complete a purchase without access to private information known only to their intended victim.

Fund Fraud Prevention and Business Expansion With 365 finance

Fraud prevention does come with a cost attached, but it’s well worth it. Falling victim to fraud can set your company back months, and you may not be able to recover lost funds. If you’re unsure if you can afford to implement fraud prevention measures, but are concerned about the risk, get in touch with 365finance.

Our Rev&U product allows fast and easy access to funding for any business investments you need to make, including antivirus software, fraud prevention training, and more. As a revenue-based finance option, Rev&U is low-risk and comes without the pressure of high monthly payments.

At 365 finance, we can provide both long and short-term financial solutions, with revenue-based funding available from £10,000 to £400,000 in capital. Apply for Rev&U today without affecting your credit score, or speak to our team to find out how we can help your business. To find out more, head to our website.