CFOs know not all prospects are what they claim to be. Potential clients will stretch the truth to get a line of credit that’s bigger than what they’re worth.
The risks of fraud are surging: 44% of credit managers say they’re seeing a rise in fraud by would-be customers, according to the National Association of Credit Management (NACM). And a lot of these scammers — though not all unfortunately — are telling on themselves right on their credit applications with B2B companies.
A new report, The Evolving Threat of Fraud in B2B Trade, sponsored by NACM and conducted by BrightQuery, is an eye-opener to say the least! Seasoned pros in credit & collection and accounts receivable may even be surprised to learn that:
- “27% of credit professionals estimate their company loses more than $1 million dollars each year due to inability to obtain sufficient customer info.”
- Once a scammer succeeds in getting a line of credit, it takes the average business one month to discover the ruse.
- About 60% of B2B credit managers deal with at least one customer fraudulently disputing a credit card charge.
- Techniques like phishing schemes and false financial documents are getting more difficult to spot despite all of the software companies buy to protect themselves.
Customer Fraud Strategies Vary by Industry Sector
NACM warns that various industry sectors need to understand their specific risk factors to avoid being taken for a ride. Scammers looking to steal from a business pattern their techniques on what’s worked before.
For example, sloppy recordkeeping is the low-hanging fruit in the transportation sector. “Sometimes companies are billed for loads they didn’t move and if they don’t have good recordkeeping and know what they are issuing, they can get billed for items that weren’t moved,” warns Sally Miller-Cheek, senior manager of shared services at BNSF Logistics. Miller-Cheek also told NACM that theft of product becomes a bigger risk when shipping traffic spikes like Memorial Day weekend and Independence Day.
Double brokering is another major risk for shippers. “Double brokers typically are legal entities that appear to be a legitimate company but do not have full-time employees or a commercial address,” according to the NACM/BrightQuery report. To help avoid a double-broking scam, insist on proof of valid legal status, employee ID and commercial address.
Meanwhile in the online B2B realm, chargebacks are a massive headache. Bank references (more on that topic below) can help businesses identify a prospect that’s prone to reversing charges — possibly for products and services it ordered and received in good faith from businesses.
Bank References Help Nip Fraud in the Bud
NACM recently hosted Trevor Hunt, senior product manager at Thomson Reuters, on its podcast Extra Credit to discuss an overlooked strategy for freezing out fraudulent prospects — obtaining their bank references. Not all companies take the time and effort to get bank references, even though it’s a proven method for measuring a prospect’s cash on hand and diligence in paying its bills on time!
Knowing a prospect’s current balance is nice. Even better for gauging credit-worthiness is the average balance over a certain set of months. “You can get a good indication of what [a customer’s] cash flow is,” Hunt advises. “Is their bank account usually drained every month? Or do they have a good buffer of cash available to them? And do they routinely have that buffer” so you know they didn’t just receive a one-time injection of cash.
“Also check the opening date of the account,” says Hunt. “Someone who’s had a lot of banking relationships can indicate … [banks] no longer wish to do business with them, probably due to not paying back loans.” A long history with a bank is a good indicator the prospect’s financial standing is healthy and poses less risk.
NACM previously polled credit & collections professionals on how often they check prospects’ and customers’ banking histories when conducting credit checks. Thirty-five percent said “not often,” 25% do so half of the time, 23% said almost always and 17% admitted their companies never request bank info.
Final thought: Banking data can reveal a prospect that’s in danger of going bankrupt. Bankruptcy rates for businesses and individuals are about as bad as they were during the great recession of 2008 and 2009. Credit pros are noting customers who’ve declared bankruptcy twice and left their creditors out of luck.
