The Woes of Credit and Fraud

Small businesses are more vulnerable to fraud than their larger counterparts. According to a study conducted by the Association for Certified Fraud Examiners, "The current report (Spring, 2008) indicates that frauds perpetrated against small businesses continue to cost more on average than those against larger firms. The average cost of a fraud event targeting businesses with fewer than 100 employees was $200,000 for the period of January 2006 through February 2008." Staggering figures such as these can have a profound impact on the bottom line of small businesses nationwide.

The primary reason larger firms are hit with less internal fraud is because of their strict systems of checks and balances. Employees (often screened by an background check) understand the internal control systems at hand when they are hired. They are aware of the procedures the company has implemented to monitor both monetary and inventory transactions.

A breakdown in the internal controls of a small business venture in some cases may lead to fraud. Sadly enough, the most precedented form of fraud in the small business world is internal theft. Otherwise known as occupational fraud. Fraudulant practices can include, but are not limited to missapropriation of cash and/or assets (the most common), false invoicing, check tampering, embezzelment, false register voids, and the list continues. These dishonest business practices made by the employees that you work with daily and often those whom you trust can equate to major financial losses. Employees are aware of the consequences if they choose to conduct dishonest business practices.

How can you prevent internal fraud as a small business owner? Ensure that you have the internal controls in place to deter such actions and enforce them. Begin with hiring the right employees for your team. Conduct extensive background checks, contact references and have them take an approved drug test. Secondly, ensure that your internal controls are in place, that enployees understand that a system of checks and balances are in place. Thirdly, monitor the cash flow within your business. Practices including cash/till audits, inventory audits, security surveilance systems, and more will allow you to keep an eye on what goes in an out of your business. Other steps including, making yourself the final approval for all expenditures. Notice that the credit card bill for gas for the company van is a little high? Are you sure that your employees are not filling up their personal vehicle while they are at the station? Lastly, ensure that you have an employee policy on fraud. The policy should state your stance on fradulant business practices and the consequences for such actions.


Are you trying to obtain financing for your start-up venture? Review the 4 C's of Credit to ensure that you are prepared to exceed the expectations of your lending institution.

The 4 C's of Credit are frequently used to determine/evaluate credit risk.

Character
Creditors will delve into the financial history of a potential borrower to determine their financial character prior to lending. Your credit history and your credit score will give potential lenders great insight into your financial past. The higher the credit score the greater the chance of obtaining credit.

Capacity
The ability of your venture to generate the revenues required to fulfill the payments on your loan is referred to as your capacity. Capacity is often difficult to determine when a business is in the start-up phase without a proven track record. Creditors wish to obtain as little risk as possible, thus a financial history with a positive cash flow will make the process of obtaining a loan much easier.

Capital
As a small business owner, capital equals the assets within the scope of your business venture. Your machinery, office equipment, building (if owned), inventory, liquid cash and more are considered capital by a lending institution. While these assets are considered with care, primarily due to the depreciation and liquidation value, they do add credibility to your financial history.

Collateral
This is the point where potentials determine exactly how much you are willing to risk to secure financing for your business. Collateral is the personal investment you the business owner is willing to contribute. Whether you are using hard earned cash, the equity in your home, or another form, all equate to collateral that lessens the risk for the potential lender. The borrower is willing to invest their personal cash and assets into obtaining financing for their business will be much more likely to obtain financing for their venture.

Business Owners Toolkit. Detecting and Deteering Fraud. 28, Apr. 2010.http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P14_1000.