Fraud Prevention

The lease for the $50,000 office equipment seemed like any other order at first glance. The customer passed the credit check without issues. But when the multinational corporation was unable to collect payment, it dug deeper and realized that the ship-to address was a residence. With more research, the business discovered that its “customer” had used stolen identity information to pass the credit check. Because the company did not use systems to check for fraudulent ship-to addresses, the fraudulent order was unnoticed and the company fell victim to ship-to fraud. Although only a handful of the company’s customer accounts were fraudulent, the company lost a significant amount of money last year because each account included large six-figure deals. What is ship-to fraud? In a ship-to fraud scheme, a criminal poses as a customer and presents a verifiable billing record, address and credit history. Companies often deem these criminals as credit worthy because their records are up to date and they have a good credit history. Often, the first few orders placed are for smaller items and the bills are paid on time, which increases the criminal’s credit limit. The criminal then places a significantly larger item and never pays the bill. Because the shipping address is a location unrelated to the actual business, the criminal can easily pick up the order and sell the goods. While ship-to fraud happens with consumer goods, the impact is typically more significant in the B2B world because the cost of the goods is higher. Also, most consumer goods are paid for before the items ship. However, B2B companies often extend lines of credit to customers or bill at set intervals, which means products are often shipped before payment. Keys to reducing risk Here are five ways you can help prevent B2B ship-to fraud at your company: Review your business application process. Most companies ask for headquarter information when determining the creditworthiness of a new business customer. However, many companies have products shipped to locations other than the headquarters. During the application process, capture all operating locations on the application. This makes it easier to determine which shipments are going to legitimate addresses and those that may be potentially fraudulent. Compare ship-to addresses with all operating location addresses. If a product is being sent to a location that was not listed on the business application as an operating address, there is a risk the purchase is fraudulent. The risk is even higher if there is large physical distance between the ship-to address and the customer’s operating and billing locations. Determine if the ship-to address is a freight forwarder or consolidator. If the ship-to address includes a container number, it is possible that the purchase is fraudulent. Criminals often use freight forwarders and consolidators to receive fraudulent purchases because it creates more anonymity for the fraudster. Check to see if the ship-to address is a P.O. box. Because most businesses don’t use a P.O box for product orders, a P.O. box used as a ship-to address should be a red flag for potential fraud. P.O. boxes are another way criminals anonymously receive purchases. Look up the address on Google. Put the address into Google and see if the business placing the order shows up in the search results. If not, look for these red flags: - A residence – Consider if a home-based business is likely to order the product. - A forwarding or consolidating business – Some of these types of businesses do not use container numbers in the address, which means physical verification is your best protection. - Property for sale – While shipments to properties on the market can be legitimate, this raises concerns because criminals often use vacant buildings as ship-to addresses. View the location on Google Maps. By viewing the photos online, you can get further verification that the address is an actual business. You can often get a feel for the area and see if there are a lot of vacant buildings or other red flags. Be sure to check the data on the photo to see if it was taken relatively recently. Empower employees to escalate potential fraud. Your employees are your first line of defense against ship-to fraud. They are the ones processing the orders, printing the shipping labels and packing the boxes. Train your employees on potential red flags and have a process to handle concerns. Encourage employees to pick up the phone and speak with customers to clarify any concerns about the address. If they aren’t convinced it’s a legitimate order, have a process for the employee to stop the shipment and escalate the issue up the chain of command. Many legitimate businesses and shipments may have a single red flag for ship-to fraud. However, when an order has multiple red flags, you should be especially cautious and delay the shipment until the shipment is proven legitimate. Because manually confirming all ship-to addresses can be time consuming, many businesses are now using automated solutions to flag suspicious orders. Your B2B company can save money and time by using a system to help eliminate ship-to fraud. By waiting to develop a process to prevent this type of fraud, your company risks becoming the next cautionary tale.  

Loan stacking is a small but serious problem for Online Marketplace Lenders (OMLs). Often invisible to the issuers of commercial capital, businesses that engage in this insidious practice are significantly more likely to become delinquent on their payments and even default entirely on their obligations. If you manage a company that issues commercial credit, you need to be diligent in weeding out these bad players to protect not only yourself but your industry as a whole. What is Loan Stacking? Simply put, loan stacking is the opening of multiple credit lines within a short period of time. (Sometimes as little as 24 or 48 hours.) Because there is a natural lag in credit reporting, the lenders involved usually are unaware that other companies are transacting with the same customer. On the personal credit side, loan stacking is a potential problem for borrowers who run their multiple credit lines near – or up to – their maximums and then find they can no longer meet all of their monthly obligations. However, it’s not uncommon for individuals to carry multiple credit cards, and most credit card companies already have reliable systems in place to ensure borrowers don’t get more credit than their incomes justify. Things are different on the commercial side. Today, a lot of short-term borrowing occurs online through Merchant Cash Advances (MCAs). Repayment takes the form of weekly or even daily debits against the businesses’ cash receipts pulled directly from the borrower's checking account. For example, a restaurant may take out a $10,000 cash advance, the lender then taking five percent of that restaurant’s daily receipts until the advance is repaid – with interest. MCAs  are not technically considered “loans,” and thus are not subject to the same regulations and oversight as traditional commercial lending.  Such advances usually cover a period of four to eight months. Some can go as long as 12 months, but rarely do they go longer. MCAs are most popular among retail stores and have helped many small businesses get funding when needed. However, problems arise when a business takes out several cash advances at the same time. Instead of paying, say, 5 percent of daily receipts to a single lender, the restaurant loses perhaps 20 percent to four lenders simultaneously. At this rate, the business becomes unsustainable and defaults. Not only is commercial loan stacking a risky practice, it can be legally problematic. Many MCA providers are now placing anti-stacking language in their contracts that require borrowers to pledge not to promise their receipts to any other companies. Stacking loans violates this provision and thus may be tantamount to fraud. How common is commercial loan stacking? Based on our research and analysis, we believe that between five and six percent of all merchant cash advances are stacked. In 2013, the MCA market accounted for about $3 billion in transactions. By December 2016, that number had probably doubled. That means that between $150 million and $360 million in commercial loans are stacked. Granted, that's a drop in the bucket for the $1.9 trillion commercial lending industry, but for a small company just getting in the business of making such credit advances, it could be a serious threat to their portfolio's health. Why loan stacking occurs Why do MCA lenders allow themselves to be pitted against each other in this fashion?  Blame the internet. The same internet that gives us the benefits of virtually instantaneous credit applications, reviews and approvals also makes it possible for businesses to easily make multiple applications within a 24- or 48-hour period. Many commercial credit reporting companies may provide updates as quick as 24 hours in some cases, a commercial MCA lender receiving a cash advance application may experience a slight delay in knowing if other lenders are working with the same customer. As for borrowers, most don't stack because they are not intending to commit fraud or otherwise game the system. They're doing so because, at the time, they believe they have no choice. Running a small business is difficult. Businesses often operate on thin margins and owners may, at times, struggle to make payroll. If there's a sudden setback or cash flow suddenly stalls, an owner may need a sizeable cash infusion just to keep the doors open. Being an optimistic lot, most owners who get multiple MCA loans do so in the belief they can quickly get over the hump, recover their losses, rapidly pay back what they owe and no one will be any the wiser. Sometimes, this strategy works. But too often, it does not. And that's when things get nasty. How to avoid loan stacking customers If you are an MCA lender and wish to avoid loan stacking customers, you have three tools at your disposal: Before making a cash advance, ask to see a full year of checking account activity. If you see a pattern of weekly or daily debits in a similar dollar range, this could be a sign that the business already has an MCA in place. If the business is relatively new, check their credit report for a high number of UCC (Uniform Commercial Code) filings. A large number of hard credit inquiries often indicates the owner is doing a lot of loan shopping, and this can indicate loan stacking. Sign up for Experian's custom short-term industry specific risk model consulting services. Signs of loan stacking, particularly in young companies with excessive UCC filings, can often be spotted using this service. For MCAs and all other forms of commercial lending to work, all parties have to play by the rules. Discouraging loan stacking not only benefits lenders, but also the borrowers who depend on the services these lenders provide.