Keep Your Business Fraud-Free With These 3 Steps

The last thing your business needs is identity theft and stolen funds -- here's how to protect you and your business.

learn more about Darin Namken

By Darin Namken

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Much to the chagrin of honest entrepreneurs and consumers, fraud and identity theft have been booming as of late. A study by Javelin Strategy & Research indicates fraud incidents rose by 16 percent in 2016, with losses increasing by about $700 million more than 2015 figures.

Given that neither government officials nor fraud protection experts have figured out how to bring opportunistic thieves to heel, it's unlikely that digital fraudsters will repent in the near future. While identity theft is a reality of our interconnected world, that doesn't mean individuals and business owners need to roll over and accept the repercussions.

Fraud and identity theft pose particularly thorny problems for entrepreneurs because of the numerous financial challenges inherent to growing businesses. Executives must juggle multiple credit accounts with salespeople treating prospects to lunch and managers purchasing strategic client gifts. Money is always on the move, making it difficult to spot suspicious activity.

Launching a successful business is hard enough, but it's even worse when you have to worry about a stranger racking up charges on your corporate accounts. The key to maintaining a successful business amid the looming threat of identity theft is educating and safeguarding yourself against the most insidious threats.

Why is identity theft such a problem for entrepreneurs?

Businesses frequently fall prey to fraud and identity theft because their leaders misunderstand the risks. Entrepreneurs mistakenly believe their small startups are too insignificant for thieves to target. But when it comes to identity theft, size doesn't matter. As long as a company possesses customer data -- particularly financial information -- it holds value for scammers.

These misunderstandings aren't limited to data breaches, however. Many leaders are under the delusion that debit cards are safer than credit cards, but scammers actually find debit cards much more attractive. Thieves can use debit cards to draw money directly from corporate accounts, whereas credit card companies are on the lookout for suspicious activity and able to step in before significant financial damage is done.

Still, neither scenario is a walk in the park. If thieves steal and max out multiple credit cards, the flood of fraudulent charges could delay company orders of supplies or prevent on-time payments to vendors or utility providers. Although entrepreneurs could recover any losses in the long run, the company would need to scramble to meet its obligations and continue producing its goods and services while attempting to mitigate any associated fallout.

Unfortunately, most entrepreneurs don't realize the gravity of identity theft until it's too late. A report by the Association of Certified Fraud Examiners suggests the average business loses about 5 percent of its revenue because of fraud. It often slips by undetected until someone in accounting spots an irregular transaction or a lender lowers a few borrowing limits.

Regardless of the size of an organization, this invisible threat is rarely top of mind -- large companies have too much on their plate to accurately monitor for fraud, and small startups foolishly believe they're too minuscule to be a target. Once identity theft comes to light, the negative consequences reverberate throughout organizations.

Related: Online Identity Theft: Curbing the Tragedy Beforehand

Fortunately, identity theft is not a foregone conclusion. Entrepreneurs can take the following precautions to protect their companies:

1. Limit employee credit card use.

Widespread use of company credit cards increases the risk of identity theft. The more cards that are in play, the greater the chance of fraud. Instead of giving a card to every executive, manager and employee, companies should maintain one account and authorize standalone uses on request.

If you absolutely must have several cardholders in your company, issue cards exclusively to your leadership team or senior-level employees. Use only one card for all employee expenses, and give control of that card to someone in your accounting department. That person will be responsible for tracking use and monitoring statements for any red flags.

You might also consider asking employees to pay for work expenses using their own credit cards and then submit expense reports for reimbursement. This tactic minimizes the potential for identity theft and for exploitative use within the organization.

Business accounts often include higher credit lines, and employees occasionally overindulge when they have unfettered access to a company card. A report by the Mercator Advisory Group found that one in six dollars charged on general purpose cards comes from business accounts, for a total of $430 billion in spending. A reimbursement structure can help curb employees' impulses to add to that figure, encouraging them to think twice about a purchase when they're handing over their own cards.

2. Switch to credit instead of debit.

Debit cards are far riskier than credit cards as they make it easy for thieves to steal money directly from bank accounts. Plus, people are much less likely to notice unauthorized transactions. Most employees are in the habit of using debit cards for small purchases, and fraudulent charges are more difficult to spot when they're mixed in with 20 innocuous items.

Employees are also more likely to overspend with a debit card. Nearly 40 percent of consumers surveyed by said they use debit cards for minor charges, which means they develop a bad habit of using these accounts freely. Unless they have a strict spending limit or know exactly how much money is in the associated account at any given time, they could easily overdraw and rack up overdraft fees. Credit cards provide a buffer against any suspicious activity and outsized expenditures.

Related: How to Choose the Best Credit Card for Your Small Business

3. Designate a transactions tracker.

The surest way to mitigate your risk of fraud is to regularly monitor all charges. Assign this task to a financial expert in your accounting department, and authorize him or her to investigate any suspicious expenses immediately.

Establish clear guidelines about the sort of expenditures employees can make at their own discretion. Consider capping the expenses they can claim without prior approval so your accounting team can predict how much the company is charging each month. A Federal Reserve study found that people make twice as many purchases on corporate accounts than they do on their consumer cards. A strict monitoring process will instill a culture of vigilance and restraint.

Related: Here's Why It Pays to Track Every Tiny Business Expense

By shoring up their organizational spending habits, entrepreneurs can shelter their companies from the raging storm of identity theft. Financial security should be a paramount concern for all business leaders, but that doesn't mean they should become overly risk-averse. Thoughtful spending strategies can prevent credit catastrophes and allow businesses to flourish.

Darin Namken

Co-founder and CEO of CreditSoup

Darin Namken is an innovative entrepreneur who co-founded CreditSoup in 2000. He serves as CEO, steering the mission of the company and specializing in new business development. CreditSoup was founded as a borrower’s marketplace for consumers seeking various financial products, providing people with information and credit solutions to meet their needs.

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