Ever feel like your loan application is running faster than your morning coffee kicks in? Well, in some cases, it’s because fraudsters are working even faster!
Small and medium-sized business (SMB) lending fraud is on the rise, and if you thought it couldn’t get worse, think again. According to a recent study by LexisNexis® Risk Solutions, this type of fraud has jumped by nearly 14% in just one year. With lenders tightening their credit, it’s becoming a cat-and-mouse game between banks and scammers.
More businesses are feeling the pressure to stop these fraudsters in their tracks, especially as digital channels become the battleground for fraud prevention. But don’t worry, we’ll help you understand exactly how these scams work and how you can stay ahead of them.
Fraudsters are using stolen business and personal identities to trick lenders into granting loans, and it often takes less than a month for businesses to realize they've been duped.
So, How Does SMB Lending Fraud Work?
It’s easier than you think. Here’s the typical game plan:
- Stolen Identities: Fraudsters either steal legitimate business information or personal details of the business owner. This gives them the credentials they need to start the scam.
- Loan Application: They apply for a loan with the stolen details. Since the identity is real, it can be hard to spot the fraud early on.
- Fake Information: Scammers provide false documents, fake social security numbers (SSN) or tax identification numbers (TIN), making the application look legitimate.
- Fast Disbursal: Once the loan is approved, the scammers disappear with the funds, leaving the lender holding the bag.
Who’s the Target?
- Small and Medium-Sized Businesses (SMBs): Especially those earning up to $10 million annually. These businesses tend to have fewer resources to verify and secure their loan applications.
- Banks and Credit Unions: Smaller institutions often have less robust fraud detection measures compared to larger banks, making them prime targets.
- Digital Lenders: Since everything happens online, it's easier for fraudsters to sneak past systems without much in-person verification.
A Real-Life Example:
A fintech lender recently reported losing over $500,000 to an SMB fraud scheme. The fraudsters posed as a legitimate business, using a stolen identity to secure a loan. By the time the lender caught on, the money had already been wired and withdrawn, leaving them scrambling to recover the loss.
Why You Should Care: Fraud isn’t just a headache for lenders. It creates a ripple effect across the entire financial system. Legitimate businesses may find it harder to access credit as lenders become stricter with their verification processes. Plus, businesses could unknowingly be used as part of a scam, leaving them vulnerable to legal trouble or financial losses.
With 17% of all fraud losses happening because businesses try to reduce friction in their approval processes, it’s clear that the need to balance security with convenience is more important than ever.
How to Protect Your Business from Lending Fraud:
- Strengthen Identity Verification: Use multi-layered verification processes, including two-factor authentication and biometrics to confirm applicants’ identities.
- Stay Vigilant in the Early Stages: Fraud is often caught in the first month of a customer relationship. Make sure your systems are screening for fake SSNs and TINs right at the point of application.
- Leverage Technology: Move beyond manual checks—implement real-time transaction scoring and behavioral biometrics to detect unusual patterns that could signal fraud.
- Share Data with Others: Join fraud prevention consortiums to share intelligence. This collective approach allows you to tap into a wider pool of data, giving you more context and better fraud detection capabilities.
- Tighten Digital Channels: As most fraud occurs online, focus on beefing up your mobile and web security measures. Larger institutions are already tightening the screws—smaller businesses need to follow suit.
Quick Tips:
- Did you know? Over 80% of SMB lenders have seen an increase in lending fraud over the past year.
- Pro Tip: Integrate cybersecurity into your fraud prevention strategy—don’t just rely on traditional financial checks.
Have you encountered fraud in your business or heard about it from others in the industry? We’d love to hear your story. Your experience could help protect someone else from falling victim to lending fraud!
Stay safe, stay informed,
Key Terms Explained:
- SMB (Small and Medium-sized Business): Businesses that earn up to $10 million annually.
- Biometrics: Using physical characteristics like fingerprints or facial recognition to verify someone’s identity.
- Behavioral Biometrics: Tracks behaviors like typing speed, mouse movement, or how a person interacts with their device to detect fraud.
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