CFOs know that not all prospects are who they say they are. Prospects will twist the truth to get a credit limit that is higher than their actual worth.

Fraud risk is increasing: 44% of credit managers say they’re seeing an increase in fraud from prospects, according to the National Association of Credit Management (NACM). And many of these fraudsters – though unfortunately not all – give themselves away directly in their loan applications to B2B companies.

A new report titled “The Growing Risk of Fraud in B2B Commerce,” sponsored by NACM and conducted by BrightQuery, is an eye-opener, to say the least! Experienced credit, collections, and accounts receivable professionals may even be surprised to learn the following:

• “27% of credit professionals estimate that their company loses more than $1 million each year due to failure to obtain adequate customer information.”
• If a fraudster succeeds in obtaining a line of credit, it takes the average business a month to discover the fraud.
• About 60% of B2B credit managers deal with at least one customer who fraudulently disputes a credit card charge.
• Techniques such as phishing attacks and fake financial documents are becoming increasingly difficult to detect, although companies are constantly protecting themselves with software.

Strategies to combat customer fraud vary by industry

NACM warns that different industries need to be aware of their specific risk factors to avoid being ripped off. Fraudsters who want to steal from a company tend to use techniques that have proven successful in the past.

For example, sloppy documentation is easy to do in the transportation sector. “Sometimes companies get billed for loads they didn’t transport. If they don’t have good documentation and don’t know what they’re spending, they can get billed for items that weren’t transported,” warns Sally Miller-Cheek, senior manager of shared services at BNSF Logistics. Miller-Cheek also told NACM that product theft is a greater risk when there are transportation peaks, such as Memorial Day weekend and Independence Day.

Double brokerage is another major risk for carriers. “Double brokerages are typically legal entities that appear to be a legitimate business but have neither full-time employees nor a business address,” the NACM/BrightQuery report states. To avoid double brokerage fraud, insist on proof of valid legal status, employee ID and business address.

In the online B2B sector, chargebacks have become a major problem. Bank references (more on this topic below) can help businesses identify a potential customer who is prone to chargebacks – possibly for products and services they ordered and received from businesses in good faith.

Bank information helps nip fraud in the bud

NACM recently hosted Trevor Hunt, Senior Product Manager at Thomson Reuters, on its Extra Credit podcast to discuss an overlooked strategy for shutting out fraudulent prospects – obtaining bank references. Not all companies take the time and effort to obtain bank references, even though it is a proven method to gauge a prospect’s cash holdings and diligence in paying their bills on time!

It’s nice to know a prospect’s current balance. An even better way to gauge creditworthiness is to look at the average balance over a certain number of months. “You can get a good indication of what (a client’s) cash flow is,” advises Hunt. “Does their bank account typically run dry each month? Or do they have a good cash buffer? And is that buffer available to them on a regular basis?” so you know they haven’t just received a one-off cash injection.

“Also pay attention to the date the account was opened,” recommends Hunt. “If you have had a lot of banking relationships, you can assume that banks no longer want to do business with you, probably because you are not repaying loans.” A long business relationship with a bank is a good indicator that the prospective customer’s financial situation is healthy and poses fewer risks.

NACM previously surveyed credit and collections professionals about how often they check the banking history of prospects and customers when conducting credit checks. Thirty-five percent answered “not often,” 25 percent do so half of the time, 23 percent said “almost always,” and 17 percent admitted their companies never request banking information.

Final thought: Bank details can reveal a potential customer who is at risk of bankruptcy. Bankruptcy rates for businesses and individuals are about as high as they were during the Great Recession of 2008 and 2009. Credit experts are noticing customers who have filed for bankruptcy twice, leaving their creditors in the lurch.