10 types of small business fraud and how to prevent them

Small business owners face numerous challenges, but data security and fraud prevention may be some of the scariest. They can cause large-scale harm to even the smallest of enterprises. Scammers and bad actors can steal credit card information, PINs, and security codes to make unlawful transactions. A data breach at your small business can also lead to Social Security number theft, identity theft, tax ID theft, data mining, and even a loss of control over your accounts.

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, 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.

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: Educate employees and yourself to recognize phishing attempts. Be careful with unsolicited emails, and don’t share sensitive information. You can use email filtering and authentication tools to detect and block phishing emails and 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 also 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: Establish clear return policies, including issuing a refund if the customer hasn’t used the product and inspecting returned items carefully. Use technology to track returned packages and keep track of inventory to know what your business shipped to the customer.

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 bank notes or checks to trick your business into accepting them. 

They may also purchase using a credit card and dispute the charge with their bank, claiming they never received the product. 

How to protect your business: Train your team to recognize counterfeit currency and establish clear procedures for handling cash and check transactions.

4. Invoice and payment frauds 

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: Verify your supplier and vendor’s information before paying and implement secure payment methods with two-step identification for any financial transaction. Monitor transactions to spot unusual or unauthorized activity.

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 scheme is asset misappropriation, which is involved in 86% of the cases,. It happens when an employee takes company assets for personal use or to sell. 

Insider threats occur when someone who works for a company steals data, gives someone unauthorized access, or leaks passwords. This could be someone in management, an employee, or someone leaving the organization. Establishing trust and confidence as leaders will help employees feel that the company’s success is also their success. 

How to protect your business: Regularly audit and monitor assets and sensitive information. Establish internal controls and conduct background checks on employees handling sensitive information. Build trust in leaders and a culture of full transparency.

6. Identity theft 

Identify theft involves scammers stealing personal or business information to commit fraud or get financial benefits. They can target businesses to steal sensitive information as well as customer data. This puts both your business and customers at risk—which can decrease customer trust. 

How to protect your business: Store customer data with encryption and secure storage practices, such as using identity verification services. Monitor credit reports and financial records for suspicious activity.

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. Employees do this by clocking hours they don’t work, and employers can commit payroll fraud by withholding wages and benefits they owe to employees.

How to protect your business: Implement two-factor authentication for payroll software and employee records. Regularly review payroll records and time tracking to ensure there aren’t discrepancies.

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. 

Or, if you display your business name on a vehicle, another driver may suddenly slam on their brakes in front of you, causing a rear-end collision and more suspension injuries.

How to protect your business: Maintain detailed records of incidents and losses and report any suspicious claims to your business’s insurance provider.

9. Vanity awards scams

Vanity awards scams occur when a business falls victim to a scheme claiming they were selected for a prestigious publication that features their small business as outstanding within their industry. This type of fraud always has a “fee” to consider.

How to protect your business: Be careful with unsolicited award notifications, especially if they request a fee or sensitive information. When in doubt, contact the organization to verify if it’s legit.

10. Fake text message scams

Fake text message, or SMS, scams are similar to phishing but in the form of a text message. An employee may receive a text claiming to be their boss or CEO, asking them to send money or sensitive information immediately. 

How to protect your business: 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.

Here are some ways to prevent small business fraud: 

• Avoid browsing unsafe websites and clicking on links such as sponsored ads and links, unfamiliar emails, and pop-up windows. Pay close attention to suspicious URLs and emails and double-check domains before clicking.
• Don’t provide sensitive information on phone calls, messages, and emails, especially if unsolicited or you don’t know them.  
• Implement security measures to protect sensitive information by encouraging strong passwords and two-step identification.
• Know the signs of employee theft, including if they work long hours or on holidays without permission, are overly stressed at work, or are living beyond their means. 
• Monitor invoices and payments to check for unauthorized purchases or fake charges and ensure you received the items ordered. 
• Train your team to identify fraud and report suspicious behavior by holding staff meetings to go over tips. 

Stay aware of potential scams and be proactive in preventing identity theft. By watching for red flags and knowing how to respond in a scam or data breach, you can help prevent your dream of owning a successful small business from becoming your worst nightmare.

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

There are many types of fraud and scams that can affect your small business. The first way you can safeguard your hard work is to educate yourself on the warning signs of business fraud and what you can do to mitigate your loss. 

Tools like comprehensive accounting software can help you keep track of your finances as they move in and out of the business. Use cash flow tracking, financial reporting, and expense and revenue categories to keep an expert eye on your finances to ensure everything is as it's supposed to be.