10 types of small business fraud and how to prevent them

Small business owners face numerous challenges when it comes to data security, but implementing strong fraud prevention measures can go a long way toward providing peace of mind. 

To facilitate unlawful transactions, scammers and bad actors may steal credit card information, PINs, and security codes. And a data breach at your small business can also lead to personal identity theft, data mining, and even a loss of control over your accounts. These threats cause large-scale harm to even the smallest enterprises and business owners. 

Some might believe larger organizations are the only ones at risk for a data breach, but it also affects small businesses. In fact, according to the Association of Certified Fraud Examiners (ACFE), small businesses had the highest median loss of $150,000, compared to larger organizations.

In this article, learn how to protect your business from business fraud and what to do in the case of a security breach.

Jump to:

1. Phishing and email scams
2. Return and refund scams
3. Money fraud
4. Invoice and payment fraud
5. Employee fraud
6. Identity theft
7. Payroll fraud
8. Insurance fraud
9. Vanity awards scams
10. Fake text message scams

How to prevent small business fraud

What to do if you fall for a business scam

Run your business with confidence

1. Phishing and email scams 

Phishing and email scams happen when a hacker sends an email to your business or employees that looks legitimate but asks for account passwords, banking information, or even company credit card numbers. 

When an employee clicks the link in a phishing email, it takes them to a replica of the legitimate site. If you enter any information, the scammer steals this data and may get access to IDs and passwords for online bank accounts and make withdrawals from these accounts.

How to protect your business from email scams

Proactive education is key to avoiding email scams. Train employees and yourself on how to identify and mitigate phishing attempts. Remember to always be cautious and flag unsolicited emails. Never disclose sensitive information over email. 

You can also implement email filtering and authentication protocols, such as SPF (Sender Policy Framework), DKIM (DomainKeys Identified Mail), and DMARC (Domain-based Message Authentication, Reporting, and Conformance), to detect and block malicious emails and fraudulent websites.

2. Return and refund scams 

Return scams happen when customers scam your business by returning a wrong or used product. Customers may also scam businesses by pretending they haven’t received a product and requesting a refund or additional products. 

With this type of retail theft, scammers may lie about purchases and return stolen goods to get money from your business. They may also exploit your business’s return policy by frequently returning items to receive refunds or replacements. 

How to protect your business from refund scams

Establish and enforce clear return policies where you specify conditions such as "unused product" refund stipulations. Rigorous inspection protocols for all returned items will help enforce this policy.

Advanced logistics and inventory management technologies can also help improve your return processes. 

Return merchandise authorization (RMA) systems and reverse logistics software track returned packages precisely, from the moment customers initiate a return to when the warehouse receives the item, making it easier to identify illegitimate return patterns and reduce chargebacks. 

3. Money fraud

Money fraud happens when a customer uses counterfeit money, bad checks, or even a stolen credit card to pay for purchases. Scammers will produce fake banknotes or checks to trick your business into accepting them. 

Another common tactic is called "friendly fraud." This is when someone uses their credit card but disputes the charge with their bank, claiming they never got what they bought. This costs you the sale and can also stick you with extra fees from your payment processor.

How to protect your business from money fraud

Train your team to spot fake money by teaching them to look for key security features on real bills. This can include items like watermarks and security threads, and make sure to always verify ID for big check payments. 

When it comes to credit cards, there are several ways to monitor for fraud:

• Use EMV chip card readers for in-person transactions.
• For online or phone orders, always use Address Verification Service (AVS) and Card Verification Value (CVV) checks.
• Monitor for unusual spending patterns, like many small purchases followed by a large one, or rapid transactions from the same card.

4. Invoice and payment fraud

Invoice and payment fraud happen when scammers send fake invoices or manipulate payment details to direct funds to their accounts. For example, a scammer may pose as your regular supplier and email your business to “remind you” that it’s time to place your standard office supply order, such as printer paper or copier toner. 

If you fall victim to this fraudulent scam, you’ll likely receive an order for overpriced merchandise. As with other fraud protection, you should also educate employees about it. 

How to protect your business from payment fraud

To safeguard your business from payment fraud, adopt a multi-layered approach focusing on rigorous verification and robust payment protocols. 

Here are some key actions you can take to keep your business safe: 

• Always verify all supplier and vendor information through trusted channels before you pay.
• A strict vendor onboarding process that includes thorough due diligence will help you set up for safety from day one. 
• Always use secure payment methods with multi-factor authentication (MFA) for all financial transactions. 
• Encrypted payment gateways are also good ways to work with vendors you may not have fully verified.

5. Employee fraud 

Employee fraud involves different ways employees could scam your business, such as asset misappropriation and insider threats. According to ACFE, the most common case of employee fraud (89%) is asset misappropriation. This happens when an employee takes company assets for personal use or to sell. 

Common types of employee fraud

• Asset misappropriation: This is the most common case of employee fraud, where an employee takes company assets for personal use or to sell.
• Insider threats: This occurs when someone who works for a company steals data, gives someone unauthorized access, or leaks passwords.
• Corruption: This type of fraud involves an employee using their position to influence business decisions in exchange for personal gain, like steering a contract to a vendor who has paid them to do so. 

Establishing trust and confidence as leaders will help employees feel that the company’s success is also their success, making fraud less likely.

How to protect your business from employee fraud

Regularly audit and monitor assets and sensitive information. Establish internal controls and conduct background checks on employees handling sensitive information. 

Building trust in your leadership and fostering a culture of full transparency can also help discourage fraud. It encourages employees to report suspicious activities without fear of retaliation and discourages fraudulent behavior from the start.

6. Identity theft 

Identity theft involves scammers stealing personal or business information to commit fraud or obtain financial benefits. 

Many scammers specifically target businesses to steal sensitive corporate data and valuable customer information. This act compromises your company and its clientele, directly impacting your customer relationships. 

How to protect your business from identity theft

To protect your business from identity theft, implement strong data security protection practices. Encrypt all sensitive customer data, and utilize secure storage solutions that comply with industry security standards. 

You'll also want to integrate identity verification services (like multi-factor and biometric authentication) into your customer-facing and internal systems. These are all key elements of business fraud prevention. 

7. Payroll fraud 

Payroll fraud occurs when an individual maliciously alters a payroll system to manipulate employee compensation. It’s a crime both employees and employers can commit. 

Employers can commit payroll fraud by withholding wages and benefits they owe to employees, and employees do this by clocking hours they don’t work. QuickBooks Time tracking, with its GPS and geofencing features, can increase visibility into employee work locations and help streamline payroll reconciliation, reducing opportunities for fraud.

How to protect your business from payroll fraud

Protect your business from payroll fraud by implementing two-factor authentication (2FA) for all payroll software access and sensitive employee records to prevent unauthorized access. 

Additionally, regularly review payroll records to promptly identify any discrepancies, such as inflated hours or altered pay rates.

8. Insurance fraud

Insurance-related fraud targeting small businesses comes in many forms. One of the most common types of fraud is when scammers disguised as customers claim a “slip and fall” accident or some other type of injury occurred at your business. 

Another scheme, particularly relevant for businesses with branded vehicles, involves staged accidents. 

Here, a driver might intentionally execute an abrupt brake check directly in front of your company vehicle, orchestrating a rear-end collision. They could then falsely claim exaggerated injuries to file claims against your commercial auto insurance.

How to protect your business from insurance fraud

Maintain detailed records of all incidents and losses on your property or involving your assets. This includes comprehensive incident reports, photographic or video evidence, witness statements, and relevant communication logs. 

Always report any suspicious claims to your business’s insurance provider.

9. Vanity awards scams

Vanity awards scams target businesses by luring them into schemes falsely claiming they have been selected for a "prestigious" publication or an "outstanding" small business award. This type of fraud consistently involves a required fee for participation.

How to protect your business from vanity awards scams

Exercise extreme caution with unsolicited award notifications to protect your business from vanity awards scams, especially if they request a fee. 

Always conduct thorough due diligence: Research the awarding organization, look for legitimate contact information, and verify their reputation independently.

10. Fake text message scams

Fake text message, or SMS, scams operate similarly to phishing but leverage text messages as their delivery method. In these "smishing" attacks, an employee might receive a text impersonating their boss or CEO, urgently requesting an immediate transfer of funds.

These messages often create a false sense of urgency to bypass critical thinking and security protocols, so you'll send money right when asked. Don't fall for it! This is one of the most common forms of fraud in business. 

How to protect your business from text message scams

Have employees save phone numbers and clarify how you will communicate with them. Instruct them to verify through a separate communication channel and not provide any sensitive information.

How to prevent small business fraud 

Even though scammers and hackers have been using the same tricks to try and commit small business fraud for years, it’s important to recognize critical warning signs of identity theft and financial fraud to protect your business and all of its data from falling into the wrong hands.

Foster a fraud-aware culture

Building a strong defense against fraud starts with your team. Create a clear fraud prevention policy and code of conduct to set expectations and clarify everyone's role in securing your business. The goal is to build a team that's always on the lookout.

Next, you'll want to implement the "four eyes principle" by segregating financial duties. This means you divide financial responsibilities among different employees. For example, one person approves invoices, and another processes payments. This setup ensures no single employee has complete control over a transaction.

Implement strong security measures

Your business's digital security is a huge part of fraud prevention. 

Enforce strong, unique passwords for all business accounts and require multi-factor authentication (MFA) for all critical systems, like your accounting, banking, and payroll software. This adds an extra layer of protection, making it much harder for fraudsters to break in.

Also, deploy robust cybersecurity defenses as digital bouncers against cybercrime like malware and ransomware. Think firewalls, antivirus software, and anti-malware programs on all company devices, and always keep them updated. 

Strategic safeguards

Beyond your daily practices, some other strategic moves can help prevent fraud. Conduct comprehensive background checks for all new hires, especially those stepping into financial or other sensitive roles. Knowing who you're hiring builds a crucial layer of trust from the beginning.

It's also smart to consider security insurance. Explore commercial crime coverage, which protects against financial losses from various types of fraud, and cyber liability insurance, which covers data breaches. These policies act as a safety net if, despite your best efforts, fraud still hits your business. 

What to do if you fall for a business scam

No one wants to fall for a business scam or fraud, but if it happens, there are specific methods you can use to try and rectify the damage.

Here’s what to do if a scammer breaches your business: 

• If someone at your small business has given a scammer remote access to their computer: Disconnect the computer from the internet immediately to stop their access.
• If you or one of your employees has paid a scammer or given them credit card or banking information: Contact the financial institution and ask that they stop or reverse the charges and cancel the credit card immediately. 
• If a scammer has convinced you or an employee to download or install a third-party application: Uninstall it right away and call a trusted IT company. Then, make sure you have antivirus software and that it’s up to date. Have this software run a system scan and delete any programs identified.
• If you or an employee has given access to any device or account to a hacker or scammer: Change all passwords as soon as possible. Remember that trusted companies and legitimate organizations will never contact your small business and request passwords.

If you think an employee scammed your business, you should gather evidence to have enough documentation of the crimes. Next, meet with the employee, lay out the case with all the information, and see if other employees are involved. Then, consider letting them go. Taking further legal action is up to your discretion.

Run your business with confidence

Fraud is a real threat, but it doesn't have to derail your business. By proactively understanding the diverse types of scams targeting small businesses—from data security threats to employee fraud—you can protect your operations from scams. 

Tools like comprehensive accounting software can also help you track your finances as they move in and out of the business, which is a great way to determine whether all your finances are in order. Use cash flow tracking and financial reporting to monitor your finances and stay one step ahead of scammers. 

Disclaimers:

QuickBooks Online Payroll & Contractor Payments: Money movement services are provided by Intuit Payments Inc., licensed as a Money Transmitter by the New York State Department of Financial Services, subject to eligibility criteria, credit and application approval. For more information about Intuit Payments Inc.’s money transmission licenses, please visit https://www.intuit.com/legal/licenses/payment-licenses/