Why even small businesses need fraud prevention
If you’re a small business owner, you must understand the need for and importance of fraud prevention, as these crimes can cause irreparable reputation damage and direct monetary losses. They can also lead to operational disruptions and legal penalties.
With anti-fraud strategies, you can minimize the risk of severe cash flow issues or even the closure of your enterprise.
Safeguarding your organization against fraud is now also more crucial than ever, as these malicious activities are on the rise. According to Experian, financial fraud against small businesses has soared by 70% since the beginning of the pandemic.
If you recognize just how vital it is to protect yourself against small business fraud risks, you can take proactive steps, including enhancing cybersecurity measures, internal controls, and employee training.
What Does Fraud Prevention Mean?
The term “fraud prevention” refers to a collection of proactive policies, strategies, and technologies designed to catch, reduce the risk of, and stop dishonest behaviors. Identity theft and payment fraud are just two examples of such malicious actions.
Protecting small businesses from financial and reputational repercussions is the primary goal of fraud prevention.
According to a 2025 report from TransUnion, the average losses that companies worldwide experienced due to fraud in the past year (2024) were equivalent to 7.7% of their annual revenue. In the U.S. alone, companies lost an average of 9.8%, a 46% increase from the previous year’s survey.
What Are the Top Types of Fraud?
Many common types of fraud and scams affect small businesses, one of which is identity theft.
Malicious actors commit identity theft in various ways, such as through financial fraud, in which they steal Employer Identification Numbers (EIN) and companies’ reputations and data. They then use the stolen credentials to do the following for their financial gain:
- Open unauthorized credit lines
- Take out loans
- Create fake merchant accounts
Credit/debit card fraud is another prevalent type. It involves criminals using stolen credit or debit card credentials to make massive purchases or withdrawals.
Malicious actors also commit impersonation crimes, a type of fraud in which they pretend to be someone “trustworthy.” When targeting small businesses, these criminals can pose as legitimate vendors or suppliers, with the goal of intercepting invoices or redirecting payments.
Why Do Small Businesses Need Fraud Prevention?
According to The Zebra, 66% of small businesses in the U.S. face considerable financial struggles. It also notes that 25% to 45% of enterprises can no longer stay open following a significant financial crisis. Furthermore, only one in four SMBs survives after 15 years.
Your firm could be at risk of those problems without protective strategies like identity verification and fraud prevention. With robust cybersecurity and internal controls (e.g., using fraud detection tools and training employees), you can minimize the following risks and mitigate their impact.
Reputation Damage
When a business experiences a fraud attack, it can cause consumer trust to erode, as it directly impacts customers’ financial safety. The public can also perceive the attack as a sign of weak business security, which can then make them fear the likelihood of future breaches.
All that can lead to consumers losing confidence in the credibility and reliability of the business that experienced an attack.
Direct Monetary Losses
Fraud can cause your business immediate financial losses, such as if criminals steal funds from your firm through:
- Scams
- Embezzlement
- Unauthorized money transfers
Crimes like these can drain your bank accounts and destroy your corporate assets. They can place you and your business in a significant financial crisis, even bankruptcy and closure.
Operational Disruptions
Your business could also be at risk of operational disruptions without adequate fraud prevention strategies, because if it experiences an attack, you’d have to divert valuable time, critical labor, and financial resources to manage the crisis. Some examples of what can happen following a fraud attack are:
- Frozen bank accounts
- IT (information technology) shutdowns
- Broken supply chains
- Damaged customer, vendor, and supplier relationships
- Reduced productivity
Legal Penalties
If an attack occurs due to a business’s failure to implement robust fraud prevention and protection strategies, the victims (e.g., clients and vendors whose data or money got stolen) can sue for legal damages.
In some cases, agencies like the Federal Trade Commission (FTC) may also become involved (e.g., due to deceptive practices like false substantiation of product claims and misuse of confidential information). The FTC can impose significant fines and penalties on businesses in these situations.
Embezzlement and credit card fraud may even lead to criminal charges. Business owners and employees proven to have committed these crimes can face imprisonment.
Frequently Asked Questions
What Fraud Prevention Strategies Should Small Businesses Employ?
Secure all digital accounts by enabling multi-factor authentication (MFA). MFA requires two or more verification factors (e.g., password + one-time pin), making it more difficult for malicious actors to gain unauthorized account access.
Enforce access control, too. Give employees access only to resources they need to fulfill their roles. It can help minimize the risk of internal fraud.
Using anti-fraud technologies and cybersecurity software is also a must. They can secure sensitive data and prevent unauthorized access.
Have your employees undergo regular security training, too. It can help them stay up-to-date with the ever-evolving tactics and technologies fraudsters use. With this knowledge, they’re more likely to spot crimes, prevent them from occurring, or respond promptly and appropriately if they do occur.
What Should Small Business Owners Do if They Catch an Employee Committing Fraud?
If you, as a small business owner, ever catch an employee committing fraud, immediately secure proof of their wrongdoing (e.g., invoices, bank records, and CCTV footage). Suspend their access to any of your corporate systems, and conduct a documented, private review.
Notify law enforcement and speak to a legal professional for expert advice regarding employee termination. While you have the right to fire an employee for fraud, you must be able to prove they committed this crime.
Protect Your Business With Fraud Prevention Strategies
Fraud prevention is a must for your business, even if it’s a smaller enterprise, as such crimes can cause reputational damage, significant financial losses, and even closure. Implementing robust cybersecurity and internal control must therefore be a top priority to prevent or mitigate risks.
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