Fraudulent Credit Applications Are on the Rise

Fraudulent credit applications are on the rise—a concerning trend in the B2B credit world. A recent eNews poll revealed that 44% of credit professionals have seen an increase in fraud attempts from new customers filling out credit applications.

Many factors are to blame for the increase in this type of fraud. For example, our increasingly interconnected digital world has presented both opportunities and challenges. Technology has opened avenues for fraudsters to exploit, especially with the rise in popularity of digital credit applications. “I think digital applications are more susceptible to fraud simply because the personal relationship between the company and the applicant is substantially diminished,” said Scott Dunlap, director of credit and collections at Coleman Oil Co. (Lewiston, ID). “I recently looked at late paying accounts and 85% were from inside sales that had no personal visit by the sales reps and were unsolicited applications received electronically. Digital applications are efficient and convenient, but nothing replaces the personal relationship.”

“There shouldn’t be a difference between the digital and paper credit application processes when the information is analyzed the same,” said Anton Goddard, president at NACM South Atlantic (Orlando, FL). “However, it’s up to the credit manager to reach out to their sales staff and ask questions as part of the digital credit application review process. Asking questions about the business location, the staff, and their impressions should always be considered.” 

With economic hardship, some businesses may feel that fraud is the only option for financial gain. Labor shortages also can create weak spots when some departments do not have enough time to thoroughly comb every credit application.

“I think all types of fraud are on the rise partially because the opportunity is there and the risk of getting caught or punishment is low,” Dunlap said. “There are a lot of gaps that were caused by the sudden change in businesses from COVID-19 that have never been properly recognized and resolved.”

Here are a few red flags when accepting a new credit application:

New businesses established within the last 12 months. One of the biggest red flags for fraud is if a business has no prior history and applies for credit. Some companies, referred to as synthetic businesses, are created to purposely default. “Synthetic companies would get credit for small dollar amounts on those accounts and with that credit, they’d pay it for a couple of months,” explained a payment risk and fraud director. “We figured out the customer sold the account to someone else, and that person would apply credit and do a bust out.”

Newly emerged businesses requesting credit applications seem to be a common warning sign with credit professionals across the industry. Gweneth Weeks, operations manager at Big D Concrete, Inc. (Dallas, TX) said she has received several credit applications from brand new companies or companies that are exactly one year established. In some cases, new customers can also be old friends. “I’ve noticed the principal of a certain company was a person associated with a different company I’ve dealt with in the past,” Weeks said. “They didn’t handle business properly and left behind a lot of unpaid suppliers. So, that was a flag that stuck out to me.”

Variations of a company’s name. If a company has a different email address from their company domain, the fraudster most likely does not want their information to be traced or connected to the actual company name being used. With an increase in the number of credit applications coming through credit departments, there is a need to move as quickly as possible to get an account set up. But if you are not careful, minor details, such as one letter switched in the email domain, can put your company at risk.

“For example, if an email says gmail.UK instead of gmail.com, you know something is not right,” said Roxanne Price, CCE, CCRA, NACM Board director and corporate credit manager at H&E Equipment Services (Baton Rouge, LA). “If it’s not a company name in the domain, that also throws up a red flag for us and we’ll have to do more due diligence just to double check that one, it is a legitimate company overall and two, that company is applying themselves and not through a fraudster.”

Odd shipment requests. Another warning sign is receiving applications from out of the area of business, which applies mainly to material suppliers. “If a customer is ordering shipments out of the area or is willing to pick up large orders using their transportation, that’s typically a red flag,” Goddard said.

Take a Proactive Approach to Due Diligence

Due diligence and KYC practices are both crucial in the new customer setup and credit application process. With economic stress and factors such as labor shortages, it can cause both credit managers and customers to cut corners, allowing fraud to slip through the cracks. Whether it is too many people assigned to the task of new customer setup or just the urgency in business and competition, credit professionals must take an extra step to ensure security.

In slower seasons of business, more amounts of fraud can leak through because some companies may overlook red flags in exchange for added sales. And some credit departments are still lagging in training after the COVID shutdowns, explained Goddard. “Working from home was convenient, but people still learn from each other in groups and collaborative environments. Credit departments were already receiving the minimal training and that standard has dropped even lower in recent years.”

Providing online forms with no software security in place to track and verify data puts your company in a vulnerable position. Some credit professionals use knowledge-based authentication (KBA) through specific software. It can detect if the person filing the credit application is a real person through security questions, for example.

Credit professionals can take proactive steps by researching a company’s website or location and using Google Maps to verify the office or business exists. Also, researching how long the website has been active is key as well because most fraudulent websites are newly created. A popular way to view an older version of website is by using the Wayback Machine at https://web.archive.org. This site searches the web and saves pages that create a digital history record. While the site isn’t foolproof, the pages are indexed into a calendar that allows users to quickly see historical versions of pages and when they existed, providing valuable insights into the age and evolution of a website.

As part of the due diligence investigation, a credit report on every customer should be obtained from a trusted source like NACM. The trade data for NACM’s National Trade Credit Report (NTCR) is contributed exclusively by NACM members and as such, is extremely reliable. “In the past three years, we’ve seen more attempts from fraudsters to try and submit fake data than ever before,” Goddard said. “The trend we’ve seen recently is companies that open internet stores try to entice people to open an account with 30-day terms and then trying to report that information to NACM, but we are not accepting trade data from these people for credit building purposes.”