Best practices for small businesses to help prevent fraud

Understanding small business online fraud

First, it's helpful to understand common types of small business fraud to watch out for, including:

• Phishing or email fraud: Fraudsters send deceptive emails to trick people into sharing sensitive information. Learn more about phishing and spoofing and how to protect your business.

• Online shopping fraud: Scammers set up fake e-commerce websites to accept payments. Customers make purchases but receive either counterfeit items or nothing in return.

• Identity fraud: Hackers steal personal information and then use it to commit a crime or make a purchase.

• Tax scam: Fraudsters pose as IRS agents or debt collectors to steal financial information.

• Invoice fraud: Fake invoices are submitted to deceive businesses into payment.

• Check fraud: Criminals may forge or alter checks to steal funds from business accounts.

• Payroll fraud: This can include ghost employees—where fictitious workers are added to the payroll—or altering timesheets to inflate hours worked.

• Contractor or vendor fraud: Vendors request advance payments for goods or services they never deliver.

• Return fraud: Customers return damaged or used items and request refunds for full value.

• Employee theft fraud: Employees steal cash, inventory, or sensitive information for personal use or resale.

• Identity theft fraud: Employees use stolen company information for personal gain or to commit fraud.

• Data breaches: Cybercriminals gain access to sensitive customer and business data, potentially leading to financial and reputational damage.

Common signs of small business fraud

Identifying the potential signs of fraud is crucial for small business owners to protect their operations and finances.

When it comes to how to detect fraud, here are some common red flags and warning signs of possible small business fraud:

• Unexplained financial discrepancies: Sudden drops in revenue or profits without a clear explanation and/or discrepancies between financial records and actual cash flow.

• Lack of oversight: One individual handles multiple financial roles without oversight or review of financial transactions and records.

• Missing or altered documents: Financial records, invoices, receipts, or contracts that are missing or appear altered.

• Inconsistent inventory levels: Frequent discrepancies between recorded inventory levels and physical counts.

• Customer complaints: Frequent customer complaints about billing errors or unauthorized charges.

What is business fraud prevention?

Fraud protection for businesses typically includes several proactive measures and strategies to mitigate the potential risk of fraudulent activities. It may involve risk assessment, internal controls, employee training, background checks, audits, cybersecurity measures, and vendor due diligence.

The goal is to help protect assets, finances, and a business’s overall reputation by deterring, detecting, and addressing possible fraud risks early and effectively.

Best practices to help prevent fraud in your small business

Looking for possible ways to help prevent fraud? Here are some potential fraud prevention tips to implement in your business:

Keep a strong and secure password

Hackers use sophisticated programs that can run through many different versions of a single password in seconds. In other words, they have the tools to easily guess your passwords and access your accounts.

That's why many websites prompt you to create a strong password of at least eight characters, including at least one capitalization and one special character (for example, “P0r$che9!!"). If you're struggling to come up with a secure password, you can also use a strong password generator to help.

Stop phishing

Train employees to spot phishing emails and fraudulent messages. For example, phishing emails might ask you to update your payment details for a certain site or submit your information to receive a government refund.

As a rule of thumb, employees shouldn't open any links or attachments from unknown sources. And if an email address, subject line, or message seems suspicious, tell them not to click or respond — but to report it to you or your IT team.

Protect your computer

Make sure you're running the latest version of your operating system (OS), as OS providers continually update their software with security patches to protect you from newly discovered vulnerabilities, as well as the latest viruses and malware.

Also, install and regularly update business-grade anti-malware and anti-spyware software to prevent attacks that exploit outdated software programs. Keep in mind that free, limited-feature, or consumer-strength anti-virus software options are insufficient, even for small businesses.

Set limits to your e-commerce

Yes, you want to make money — but not at the expense of your safety and security. That's why you should set limits for the number of purchases and total dollar value you'll accept from one account in a single day.

If you sell casual boots, for example, and one customer tries to make 10 purchases worth thousands of dollars in under 24 hours, you know something suspicious is happening. You may be able to set up your e-commerce site to flag these types of transactions for you.

Use the address verification system

When a customer pays with a credit card on your site, they should be prompted to enter a billing address for that card. That's where the address verification system (AVS) comes in.

The AVS compares the customer's entered billing address with the address on file at the credit card company, verifying the cardholder's information. This AVS check is an online fraud tool included in most payment processing solutions but check with your payment processor to be sure they support it.

Require the card verification value

The card verification value (CVV) is that three- or four-digit security code printed on the back (and sometimes the front) of credit cards. According to Payment Card Industry (PCI) compliance rules, merchants can't store the CVV as part of a customer's credit card information. Therefore, it's one of the most effective forms of fraud protection because customers must enter their CVV every time they check out. Plus, it's virtually impossible for hackers to get that number unless they've stolen the person's physical credit card.

Most payment processors include a tool to require CVV as part of their checkout templates, so make sure to use it.

Connect to a secure Wi-Fi network

Hackers can use unsecured Wi-Fi networks to tap into devices and steal information. That's why it's so important to make sure you're using a secure home or office Wi-Fi network.

You can do this by installing a firewall, setting access restrictions and guest permissions, and creating a secure password for your wireless network. Also, when you're not at home or in the office, be cautious about connecting to a Wi-Fi network that's unknown or publicly accessible.

Effects of fraud on small businesses

The effects of possible fraud on small businesses can be significant. Here are some examples:

• Financial loss: Fraud can result in direct financial losses, including stolen assets, funds, and inventory, as well as decreased profits.

• Reputation damage: Small businesses may suffer reputational damage, losing customer trust and loyalty.

• Operational disruption: Fraud incidents may disrupt day-to-day operations.

• Increased costs: Implementing fraud prevention measures and recovery efforts can increase operational costs.

• Credit challenges: Fraud may impact a business's ability to secure credit or loans.

• Legal consequences: Fraud can lead to legal issues, including lawsuits, fines, and regulatory penalties.

How to report a suspicious message

When you do spot a suspicious message, report it right away to help stop the threat and minimize your risk of fraud.

You can report fraud to government agencies, credit bureaus, and financial institutions. For example, the FTC has a website dedicated to reporting fraud, and PayPal provides businesses with clear instructions for reporting suspicious messages.

How PayPal helps buyers

We know how important security and peace of mind are in online business. Learn more about PayPal Seller Protection here.²

So go ahead and set up shop. We've got your back.