Small businesses are the most common victims of fraud, at the highest rate — 31.8 percent — of any company-size category and with the largest median loss, Reuters reported in September.
“Small businesses are particularly susceptible to fraud because they have fewer resources. Yet, the impact of the resulting losses is usually much greater than for larger businesses,” Michelle DiGangi, an executive vice president at Bank of the West, told the news service. “Fortunately, there are precautions, which in many cases are fairly simple to execute, that owners can take to better protect themselves from being victimized.”
The first step, of course, is being aware of the potential dangers swirling around you. Here’s a rundown of five popular small-business scams to avoid — particularly if you’re looking for a quick way to raise capital.
1. Funding kits — The phony idea you’re being sold here is that money is readily available to those with the right information. Specifically, the scammers offer you detailed information on how to obtain government grants (“you don’t have to give it back!”), no-interest loans, or investments with extremely favorable terms. The catch? You have to pay for the “funding kit” that contains all of this information. Of course, it either never arrives or contains resources that are readily available for free elsewhere. In the end, you’re no closer to getting the funding you seek than before — and you’re set back whatever you paid for the kit.
2. Phantom investors — In this scam, you’re contacted by an “agent” of a large financial fund or by a wealthy individual who wants to invest in your company. But first, you must “qualify.” A lot of documentation, nondisclosure agreements, and pie-in-the-sky promises follow. When the dust settles, however, you’ve paid for a lot of paper-pushing and haven’t received a dime, nor will you.
3. Advance-fee loans — Who needs investors when you can get a low-interest loan instead? Or so goes the come-on. The swindlers behind advance-fee loans promise rapid approval of your application (that is, if they even require you to fill one out). But first, you’ll have to come up with “processing fees,” “application fees,” and/or “premium service fees” that, for whatever reasons, can’t be rolled into the proceeds of your loan.
A variation of this scam involves showing you an attractive “term sheet” that promises a loan in 60 or 90 days, if you plunk down a deposit to “hold the offer open” while the lender conducts due diligence. Sounds reasonable, but it’s not. After you pay, the result is always the same: no loan, and no refund of your deposit.
4. Overpayment retainer — Your company, it suddenly seems, is so attractive that clients and customers (offshore or domestic) are eager to send you money. The funds usually are offered as an advance fee or a retainer to cover the purchase of products or services. But the client or customer, who’s rarely easy to reach, pays you too much. Oops!
But don’t worry, the phony customer says, “just go ahead and deposit the check and refund the difference.” The generous “client” may even encourage you to keep a bonus for yourself, too. Don’t take the bait. When the original check turns out to be worthless, you’ll get stuck with the bounced-check fee, plus whatever balance you so trustingly “refunded.”
5. Excess inventory sales — In this apparent opportunity, a new “partner” persuades you to “buy into a franchise” that enables you to profit from moving excess inventory. The deal is simple: You find legitimate businesses with inventory to sell, which your franchise partner will buy and quickly flip to someone one at a huge markup. You will collect a handsome “finder’s fee” or “commission” on each of these transactions. Trouble is, none of these sales ever takes place. You simply lose the “franchise fee” you paid.
If you suspect that someone is scamming you, stop participating in the deal immediately — and cancel any accounts you’ve inadvertently compromised. (Once you’ve lost money in any scam, you’re unlikely to get any of it back.) Contact the proper authorities, even if the scam crosses international borders. Maybe you’ll save someone else from falling victim to the same fraudsters.