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Credit Fraud is Alive and Well
By Michael C. Dennis, MBA, CBF

Credit Fraud Articles
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Scenario: For the second time in two years, we lost a moderate five-figure balance to credit related fraud. The con game worked the same way both times. Con men acquired a business with little or no money down, and took over operations. They immediately began to purchase larger quantities of products from their established vendors, and using the acquired company's good name, strong credit rating, stability, financial strength, and payment history contacted other creditors including us. Their pitch was:

  • Our current supplier has been missing important deadlines from time to time

  • We are becoming concerned

  • We think there is room for another supplier

  • If your quality is good, your prices are competitive and your deliveries are on time it may be possible for you to supplant our current supplier as our primary supplier [of the products we manufacture]

Of course, no mention is made of the ownership change, or the fact that other potential new suppliers are being told the same thing and given the same opportunity to capture market share from one of its competitors. The customer appeared credit worthy. We shipped. They paid, arranged for our salesperson to pick up the check and ordered an even larger amount. We even went to the trouble of verifying funds before the second order was released and shipped to our new customer by overnight carrier. So what happened? The check bounced. When we contacted the customer, we got voice mail. When we called the next day, the phones were disconnected. When we tried to update the credit report, the credit bureau had the file under review. Shortly afterward, the debtor filed bankruptcy and we were out a great deal of money.

I believe the following lessons can be learned from this experience:

  • Always look a gift horse [or a gift order] in the mouth.

  • Develop specific policies for scrutinizing new accounts that suddenly want to purchase large amounts on open account terms. Most relationships start slowly, and large orders come only after the vendor has proven itself again and again.

  • Be suspicious when a new customer needs large dollar orders delivered to them by overnight carrier.

  • Watch the profit margins at which the sales are being made. If profit margins are unusually high, it may be because the customer has no intention of paying the invoice anyway.

  • Recognize that simply because a customer has enough money on deposit on a certain day to cover a check it has written does not mean that the money will be available when the check is presented for payment. By hand delivering the check for the first order to our salesperson late in the day, this customer was guaranteed at least one extra day of float on the check before it could be presented to its bank and ultimately returned due to insufficient funds.

  • Make certain that your salespeople send checks to your lockbox, not to the main office. Since the check in question was mailed to our headquarters and then forwarded to our bank for deposit additional time was lost.

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