How Small Business Suppliers Can Identify Potentially Fraudulent Customers

In today’s digital age, small business suppliers must remain vigilant against fraudulent customers who order goods with no intention of paying. Fraudulent activities can severely impact a small business’s cash flow, inventory, and overall financial health. Here are some key strategies to help identify potentially fraudulent customers:

1. New Customers with Large Orders

A new customer is great news for a small business looking to grow. But rather than getting excited and rushing blindly in to fill the new order, it would be wise to apply careful scrutiny:

• Credit Check: For large orders, consider running a credit check or requiring a deposit.
• Verification: Use third-party services to verify the customer’s identity and business legitimacy.

2. Signs of a Fraudulent Company

When looking at their credit report, specific signs may indicate a company is fraudulent. Note that credit reference agencies will base their ratings on filed information and fraudulent companies might not be identified until after a fraudulent company that has filed fraudulent returns, has done a runner and left a string of unpaid debts. Look out for these warning signs:

• High Turnover and Profit from a Standing Start: Companies showing high levels of turnover or profit shortly after being formed or after a period of being dormant can be suspicious.
• Easily Disposable Products: Be especially wary when you supply products that can be purchased on credit and quickly resold. You could be asked to make deliveries to a rented warehouse and a month later when your invoice is due, the warehouse is empty, and the fraudsters are long gone to a new address where they can re-sell your goods for pure profit.
• Un-audited Accounts: Watch for companies that have recently filed accounts with large, rounded figures and excessive asset valuations. Such tactics are used regularly by fraudsters looking to obtain a strong credit rating so they can place orders with unsuspecting suppliers.
• Unusual Accounting Periods: Filed accounts for unusual accounting periods can be a red flag. Have they recently filed accounts for a shortened period showing large profits or heightened valuations? Such tactics are common in those looking to boost their credit rating fraudulently.
• Changes in Registered Office: Has the company recently changed their registered office from a trading address to a rented office, or a generic registered office? Changes to a default address, especially to the Companies House Default Address, (PO Box 4385, Cardiff, CF14 8LH), should be taken seriously. This link explains why.
• Recent Company Name: Recent changes in company name or appointed directors are concerning. Has the company changed its name to indicate a change of industry? Often fraudsters will take a dormant or inactive company that has nothing to do with the current trade and changed it to something to make it more plausible for ordering your goods. For example, was your new customer who now claims to be a wholesaler, previously known as a company, that sounds like something completely different, such as a repair shop?
• Director Changes and Number of Appointments: Have all the previous directors resigned and all new directors been appointed? Frequent changes in directors and multiple appointments can indicate fraudulent intent.
• Director history: Do the directors have any history with successful companies, or do they have a history of dissolved companies in their wake?
• Mimicking: Often fraudsters will claim to be part of or associated to a legitimate business when in reality they are nothing to do with them. They may use web addresses or emails that are similar but slightly different. They may claim to be a subsidiary office/warehouse to the main company. Do not accept just the email, website, physical address or phone numbers provided by the new customer. Google the company to check they match the details of the real company and not just a close match but an exact match. Remember that letterheads and logo’s can be copied and altered. If the addresses or numbers are different, contact the company head office to check direct to check the details you have been given are legitimate and those placing the orders are authorised officers of the company.

No single one of the above warnings signs is a guarantee of fraud, but the more of them you see in a particular case, the more concerning and more suspicious you should be.

3. Inconsistent or Suspicious Order Information

One of the first red flags is inconsistent or suspicious order information. Be wary of the following:

• Mismatched Billing and Shipping Addresses: Legitimate customers usually have matching billing and shipping addresses, or at least they can provide a plausible reason for any differences. Are they asking you to deliver to suspicious or unusual addresses?
• Unusual Order Sizes: Large orders that deviate significantly from typical order patterns should be scrutinized. Fraudsters often place large orders to maximize their gains quickly. They may place a few small orders which they happily pay for but then suddenly place a massive order which they intend to do a runner on.
• Rush Orders: Fraudsters may request expedited shipping to receive goods before the fraud is detected.
• High Stock Levels without Storage Capacity: Is the company ordering large quantities of items inconsistent with their company profile. Are they looking for high stock levels without appropriate storage capacity.

3. Payment Red Flags

Payment-related red flags are a critical indicator of potential fraud:

• Payments from other sources: Often fraudsters will make payments on the initial smaller orders from other companies or from an individuals personal account. This maybe evidence the fraudulent company doesn’t really have any assets.
• Declined Transactions: Multiple declined credit card transactions before a successful one could indicate card testing.
• Untraceable Payment Methods: Be cautious with customers who insist on using untraceable payment methods like prepaid cards or certain cryptocurrencies.
• Charge-backs: Frequent charge-backs from the same customer suggest fraudulent activity.

4. Customer Behaviour

Observe customer behaviour for signs of fraud:

• Reluctance to Provide Information: Genuine customers are usually forthcoming with information. Fraudulent customers might be evasive or provide incomplete details. Do you have the company number, the company VAT number, the directors personal details? Or are they being vague on their identity?
• Excessive Communication: Fraudsters might over-communicate to build trust, or conversely, they might avoid communication altogether once the order is placed.
• Deliveries: What do your delivery drivers find when they visit. Do they appear to be a trading company with plenty of activity, branded vehicles, customers etc, or does the site seem suspiciously quiet?

5. Regular Monitoring and Reviews

Regularly monitor and review transactions:

• Transaction Monitoring: Continuously monitor transactions for unusual patterns or deviations from typical customer behaviour.
• Customer Reviews: Periodically review your customer database and identify any customers with multiple red flags.
• What is their internet footprint: Does the company have a functioning website where one can place orders and make transactions, or is it only a veneer, giving the appearance of a trading company but lacking in details, activity and functionality? Do they have reviews? What do you find when you google them? Do they have complaints?

Conclusion

Protecting your small business from fraudulent customers requires vigilance, the use of technology, and the implementation of clear policies. By staying aware of warning signs and employing proactive measures, such as prudent credit limits and carrying out frequent checks, you can safeguard your business and ensure its continued growth and success.

If you are in any doubt about a new customer, one precaution is to seek personal guarantees (joint and several) from the directors and ask them to provide their personal addresses to back them up.

By incorporating these strategies, small business suppliers can better identify and prevent fraudulent activities, thereby protecting their assets and maintaining a healthy bottom line.