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Home Biz Fraud Alert! Starting a homebased biz? Then you need to know the top three ways new home biz owners get scammed.

By Paul and Sarah Edwards

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Unfortunately, many home businesses, particularly new ones, find themselves the victims of fraud. And while the self-employed can be--and are--victims of fake charities, identity theft and money transfer schemes involving the use of your bank account, experience has shown that home businesses need to be on guard against some very particular ways of becoming victimized. The top three scam?

  • Getting ripped off by a company offering what appears to be a bargain-priced health insurance plan
  • Being cheated by partners or business associates
  • Getting scammed by customers who don't pay their bill

Fortunately, you don't need to hire a professional to help you protect yourself against these too-common sources of fraud. By exercising some care, you can protect yourself against most scams.

Insurance Scams

Health insurance is something every home business needs to factor into its startup plans. Unfortunately, health insurance for your family can cost a self-employed person as much as $10,000 a year--and the cost keeps going up. So it's not surprising that health plans purporting to offer discounted group rates for only a few hundreds dollars a month reel in many small businesses. Such offers are sold as "association plans," and while there are many legitimate associations providing their members with health insurance, the association banner is frequently used to sell bogus plans.

For example, a few years back, a company chartered in Nevada named Employers Mutual used 16 different associations to sell both individual and group insurance before the company was closed by a court action in 2001. Some of the associations had been set up by Employers Mutual just to sell insurance, but other legitimate associations were duped into offering this insurance to their members. When closed, the company left $30 million in unpaid claims.

What can you do to protect yourself? Only buy health insurance from an insurance company chartered to do business in your state, whether you purchase it through an association or not. Many states provide information about a company's financial soundness and policyholder experience with complaints if they're licensed and regulated by the state. By searching the web through sites like the Better Business Bureau or using search engines with the company's name coupled with terms like "complaint" and "fraud," you may turn up information that will help you avoid the problems others have experienced.

Partners and Business Associates

When we wrote a chapter on overcoming obstacles for our book Secrets of Self-Employment, we interviewed nearly a hundred self-employed people about their worst experiences in being their own boss. Problems with partners was the most frequent answer we heard, and too often, the situations involved fraud, such as having turned over the financial management to a partner who embezzled funds or didn't pay bills and ran off, leaving the remaining partner with a huge debt. So while it's tempting to launch a new business with a partner, some steps should be taken to prevent losses that have nothing to do with how viable your business is, such as:

  • Before you enter into a business partnership, just as prior to marriage, date first. Do some smaller projects with your prospective partner to get a good idea of the kind of person you'll be depending on.
  • Exercise oversight of your entire business, either directly or by hiring a third party such as an outside accountant. This means never simply handing off responsibility and saying something like, "You handle everything in regards to money--that's not my thing."

Customers

In an eagerness to acquire their first customers, new businesses will sometimes get burned by people who make a habit of not paying those they do business with, whether that's their web designer or their PR consultant. They run up a bill, and when it comes time to pay, they're either gone or claiming dissatisfaction. Some new businesses that thought they were getting off the ground have instead found themselves deep in a financial rut.

This is why it's extremely important to get paid at the time you deliver a product or service. When doing long-term work or major projects, have agreements that are signed in writing, get deposits, and arrange for progress payments. Also, be sure to stop working if you're not getting paid.

In another kind of customer fraud, companies--particularly those from outside the country--will place small orders with businesses and pay you with cashier checks. These companies build up your trust so that when they send you an urgent large order, you're tempted to ship on credit...and you never receive payment. Or you may even be sent a cashier's check that looks like the ones you'd previously cashed but that turns out to be bogus.

You can get some help checking out an international company's legitimacy by contacting that country's Desk Officer at the International Trade Administration or by calling (800) USA-TRADE.

Scammers are continually finding new ways to take money from the innocent--that's why it's called "criminal enterprise." There's no substitute for being constantly mindful of two classic sayings: "If it's too good to be true, it is" and "There are no such thing as free lunches."


Authors and career coaches Paul and Sarah Edwards are Entrepreneur.com's "Homebased Business" columnists. Their latest book is The Best Home Businesses for People 50+. Contact them at www.workingfromhome.com.

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