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Common Small-Business Scams

Protect your business by getting familiar with some of the more creative scams entrepreneurs are falling prey to these days.
January 25, 2007
URL: http://www.entrepreneur.com/article/173648

They contact you by phone, fax and e-mail. They're ready with invoices for you to pay, services for you to order and PO boxes to collect your money. Modern scammers have thought of everything: The only thing that stands between them and your money is keen awareness on your part.

What types of scams are most popular these days? From overpayments that need a refund to inquiries about selling your business, the following "smart" approaches are luring even cautious entrepreneurs.

A "Heavy" Pre-Pay Shipping Scam
"As soon as the TTY operator told me the call was coming from Nigeria, while the woman had me on hold, I knew something was up," notes Bruce Webber of Webber Floor Covering in Maple Heights, Ohio. Webber had received calls from TTY operators before, working on behalf of the hearing impaired. In this case, it was a call from a woman who wanted to order tile for a church in Alaska. But when she put him on hold for a few moments to try to send him an e-mail, Webber commented to the operator on the lengthy wait.

"I'm not sure if she did it on purpose or just let it slip.typically they don't tell you where the caller is calling from, but she did" says Webber, who had read in a floor covering industry magazine that such scams were going on. The idea of using a TTY operator is to make the call untraceable and possibly to play on the sympathy of the victim, who believes he or she is helping someone with a hearing disability. When Webber told the operator he didn't realize the call was from overseas, the caller overheard him and quickly got off the line. She never rang back.

"It's a pre-pay shipping scam," explains Eric Appleby, director of electronic sales and marketing for Ohio Valley Flooring in Cincinnati, who had heard of the scam from several colleagues "They give two credit cards to the retailer--both are valid and go through. Of course, you find out later that they're stolen credit card numbers. Then they order heavy items to bring up the shipping charges and ask you to pre-pay the shipping to a P.O. box at a distant location," explains Appleby, adding that they often select special order items that the company will have a harder time disposing of, making the victim more likely to front the shipping bill for the big special order.

The TTY pre-pay shipping scam has been reported to various better business bureaus by lumber companies, furniture dealers and other businesses that sell heavy items that result in high shipping charges.

Smart Tip:Don't ship any products to a buyer on a pre-paid basis unless you've done business with the company previously or can verify the legitimacy of its payment method.

The Overpayment Approach
For David Rosenbaum of Real Time Computer Services in Armonk, New York, taking a personal approach with his customers has been key to the success of his computer consulting business. "We build a relationship and have a degree of trust with most of our clients," says Rosenbaum, who's even carried a few familiar clients who had cash flow problems in the past.

It was this trustworthy nature that allowed Rosenbaum to get caught off guard several years ago by an Alabama-based outfit that ordered software from him and sent a check to cover the costs. Because the company had paid several hundred dollars over the total cost of the software, Rosenbaum sent them a check with the order to make up the difference. Only later did he find out their check was from a bank account that had been closed years earlier.

"I didn't mind sending the software, but they took money from us on top of that," says Rosenbaum, whose new policy is to return an overpayment check immediately, uncashed, and ask for a check in the proper amount.

The overpayment ploy can not only net materials for the scammers, but a refund, too, if the seller acts too quickly before making sure the check clears. Perpetrators of this scheme will often emphasize the need for the item in a hurry, prompting haste over sound judgment.

Smart Tip:It's better to be safe than sorry. Never send products or refunds to a first-time buyer until their check has cleared the bank.

Valuation Fraud
"The business sends faxes asking if you're interested in selling your business," says Sue McConnell, PR director for the Cleveland Better Business Bureau. "If you want to sell your business, they claim they'll find buyers interested in your company. You send a fax back, and they send someone to come out to speak with you. After that, you pay several thousand dollars in advance to have a valuation done to determine what your business is worth. After you've paid, they disappear," explains McConnell, whose office has issued a warning to the local media and on their website after this scam was reported by several area business owners who'd been duped.

According to the warning issued by the Cleveland Better Business Bureau, "The Secret Service is investigating complaints from hopeful sellers who report they were duped into paying advanced fees ranging from $5,000 - $11,995 to Global [Business Acquisitions] for the valuation. Once the fees were paid, Global made no further attempts to assist the seller with finding a buyer. Although Global promised to refund the fees upon request, victims who tried to get a refund were either denied or discovered the telephone number was disconnected."

Smart Tip:Think twice before pursuing any faxed inquiries about selling your business. Always check a company's references before pre-paying for any services.

Directory Fraud and a Bit of Harassment
"At one point, they called six times in a row and were yelling at me," recalls Lorraine Price, front office manager for McCune Audio Video Lighting in Anaheim, California. The persistent calls followed an initial phone conversation her boss had had with a sales representative from Central Com Marketing Inc., who told him that a directory listing was about to expire and he needed to renew it. Without much information, her boss initially okayed the request. When the bill for $489.99 arrived, however, it was for a directory that neither he nor Price had ever heard of.

"They lied and said we were renewing something, but we told them we'd never heard of, or seen, their directory," explains Price, who was never sent a copy of the so-called existing directory even after she requested it.

"I sent back the invoice and explained that we weren't interested in their services," adds Price, who then received numerous phone calls over the next few months from Central Com. Price reports that she contacted the FTC and her local Better Business Bureau, the latter of which contacted Central Com by mail, requesting that they find a way to resolve the situation. They then followed up to make sure Price never heard from them again. Later, after conducting an extensive internet search on her own, Price says, "I found a lot of fraud reports on Central Com."

The concept of bogus invoices has been around for years. The glut of modern directories--in print, online and on CDs--is a new springboard for scammers who sign up businesses but never produce a directory. To steer clear of the law, some businesses will reportedly print--but never distribute--a few copies of a directory to have something to show for their efforts.

Smart Tip:The bottom line is, if you haven't seen a directory before and can't verify that it's actually distributed, you'd be wise to steer clear of any such offers.

Blue Sky Scams
Most industries have their own inherent scams. For years, the used car industry received the bulk of the abuse. Today, however, many industries have their own inside scam stories.

In the vending industry, for instance, scamming is so prevalent that it has a name: blue sky scams. "In this industry, if you get a few good locations, you can make a living. That's the basis of the blue sky schemes," says industry expert and Vending Times editor and chief Tim Stanford. "Companies try to convince you to spend $30,000 on machines and they'll find you good locations and set it all up for you. Then they don't come through."

In 1987, Beverly Bowers found herself the victim of a blue sky scheme. "I bought a vending machine package from what I later found out was a blue sky company," says Bowers, now owner of Blue Moose Locators in Cincinnati. "I spent three times what the equipment was worth and basically lost my shirt on the deal.

"But I got lucky and found some good locations on my own and eventually dug out from under and made the business work," adds Bowers, who built up a vending business, which she ran for 20 years before selling it and starting a locating business to help other businesses find prime locations for vending machines. Unfortunately, many people aren't as resourceful as Bowers and instead wind up deep in debt, with thousands of dollars of equipment--for which they've grossly overpaid--and no prime locations in which to put them or guidance from the operators who promised them the world, then disappeared.

Smart Tip:If it's the vending machine business you're interested in, do your own homework and contact companies you've done your research on. And be leery of local ads for new vendors that offer a toll-free number and a chance to make "big bucks."

Whether it's bogus invoices or pre-paid shipping requests you're dealing with, staying one step ahead of the scammers is critical for all business owners. To do so generally means taking a cautious approach on fax, phone and e-mail orders and offers as well as making sure you've got the money on hand before parting with your goods or services. Above all, trust your gut: If something sounds to be good to be true, well, it generally is.

Rich Mintzer is a freelance journalist and the author of several business books. He lives with his family just 30 miles north of New York City in Mt. Kisco, New York.