How Fraud Impacts Small Business Owners

In 2022, 46% of businesses experienced some form of fraud, corruption, or other economic crime. As startling as this finding may be, it highlights a very real threat to companies in a strained economic environment.

Small businesses, in particular, can feel the heat of fraud much more than their larger counterparts. These organizations continuously operate with limited resources, which could make them extra vulnerable to scams. For instance, employees of smaller companies often assume multiple roles. This practice can expose them to sensitive business information, increasing the risk of data leaks. On the other hand, when burdened with countless responsibilities, it is easier to make errors or miss the obvious warning signs of fraudulent advances. Some of these oversights could have costly repercussions for both employees and the business.

The impact of fraud on small business owners could be varied and long-lasting. Understanding its consequences is essential for implementing effective defensive mechanisms to protect your business.

Types of Fraud Small Businesses Encounter

External scam threats to your organization can arise from individuals and entities both known and unknown to you. For example, a supplier could bill you for items they have not provided. A cybercriminal could target your employees for a phishing attack and access your business’s bank accounts. Or, a customer could request a chargeback from their credit card company once they receive a product or service from you—a practice known as friendly fraud. Far worse, a criminal could pose as a customer and provide a bad check. They could then ask for a refund before you find out the check has bounced.

These external frauds are fairly prevalent and account for 69% of all threats small business owners experience. Understandably, their varied nature makes them extremely difficult to anticipate and recognize.

Internal threats, however, are easier to detect and prevent. They can include petty theft as well as more serious fraud. For example, an employee could clock in an extra few hours, falsify an expense claim, steal company assets, take copies of confidential customer data, or accept bribes from suppliers in return for business favors.

The Impact of Fraud on Your Small Business

The consequences of fraud are multifaceted. The common outcomes include:

  • Reputational damage

Whether the threat was externally or internally derived, fraud could severely damage your business’s credibility and reputation.

For example, rumors of a data breach could agitate customers. Naturally, they will worry about the safety of their personal and financial data your company holds. Similarly, an employee-related financial crime, no matter how small, could create doubt among auditors, lenders, and investors, particularly regarding your business’s operational and governance processes. It could also be a concern for suppliers and business partners.

In general, news of any type of criminal activity can lead to speculation and distrust among external stakeholders. Regaining their trust and rebuilding your business’s reputation will be an uphill battle.

  • Operational disruptions

The revelation of a scam can create chaos in any organization. The ensuing investigations, for instance, could be unpleasant for all internal parties, from the suspected culprits to those who missed the warning signs.

A fraudulent incident could also hold up regular business activities, including customer engagement, sales, and supplier payment processing. Moreover, it can affect employee morale and the general mood of the company culture.

  • Financial costs

Another important impact of fraud on small businesses is the financial consequences. Depending on the criminal activity, the costs can be direct, indirect, or both.

For example, a phishing scam that wipes out your company’s bank account or a falsified expense claim by an employee will have a direct and quantifiable financial impact.

However, when you get sued by customers for a data breach that compromised their data safety, it is hard to predict the compensation costs, fines, and legal fees you could incur. It might even be in the range of billions of dollars, as Facebook bitterly found out when it was fined €1.2bn this year by the Data Protection Commission of Ireland.


Protecting Your Business From Fraud

A few deliberate measures can go a long way in preventing and mitigating prevalent threats.

Here’s what you should know:

  • Set up the infrastructure

Establishing a robust tech infrastructure to protect critical data is crucial for any business. After all, your customer information, supplier agreements, business plans, and patents are vital assets you need to safeguard. So, adopting access controls and network security measures is essential.

Policies, SOPs, and guidelines are also necessary for a strong operational infrastructure. They define your organization’s expectations, protocols, and actions to identify and combat internal and external crime.

  • Get employees involved

In many instances, fraudulent activities occur due to employee negligence or errors. In other words, most of them could have been avoided with adequate awareness and knowledge. For instance, employees can avert phishing attacks using simple verification practices. A Google search, a reverse number lookup on PhoneHistory, and a quick email check could all allow them to authenticate requests effortlessly.

The bottom line is that educating your staff about fraud prevention, training them on identifying threats, and gearing them up with the right tools to tackle fraudulent advances could help minimize many of the common risks. Assigning clear responsibilities and setting KPIs is also critical to hold them accountable.

  • Remain vigilant

Staying alert is the best remedy to avoid fraud. This requires continuous checks and reviews. For instance, running background checks of employees, screening suppliers, conducting periodic audits of all functions, and monitoring your bank balances and transactions should all be a mandatory part of your business operations.


To Conclude

Those with criminal intent have much to gain by targeting large-scale organizations. But it doesn’t leave small businesses off the hook. These companies often lack the resources, staff, budgets, systems, and frameworks to safeguard their operations against criminal activities. So, they are easier to infiltrate and, therefore, are at a higher risk of facing fraud. However, with sufficient knowledge and systematic measures, you can easily identify and prevent internal and external crime and protect your small business from fraudulent threats.

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