Picture this:

As a small business owner, you receive an invoice from your trusted supplier way too early. You immediately settle this bill to manage your cash flow and avoid delinquency. But you fail to realise that the invoice looks rather peculiar with distinct payment methods and contact details—only to find out later you’ve been scammed!

Here’s the problem: Invoice fraud is prevalent among businesses. However, it’s all the more concerning for startups and small enterprises. Why? Unlike big companies or large corporations with human and material resources, small businesses are more prone to sophisticated fraudulent activities. 

So, how do you protect your small business from this?

Fret not, as this page tackles what you need to know about invoice fraud, including its various forms and the telltale signs to be wary of. More importantly, learn how to protect your small business from these potential scams by reading below.

What Is Invoice Fraud?

As the name implies, invoice fraud is a type of financial scam involving—yes, bills. It occurs when an expert fraudster deceives you to pay for a fake bill. This case happens among individuals and even businesses, especially startups and small business enterprises.  Quite alarming, isn’t it?

As a small business owner, think of getting a fictitious billing statement that looks real and valid. It’s asking you to settle this bill for goods or services you’ve never had in the first place. If you aren’t careful enough to examine this invoice, you just might be caught off guard and fall prey to this scam.

Take it from Rodger Desai, CEO of Prove. He has his fair share of witnessing alarming cases of invoice fraud, especially among small businesses. 

Desai says, “Invoice fraud is rampant. It can really hurt small businesses by siphoning their finances with unbelievable fake bills. However, it often goes unnoticed until you realise you’ve been scammed, and it’s all too late. The tricky part? The scammers might be outsiders or even people within your team, so staying alert is a must.”

Here’s the catch: You might think you could tell what products or services you ordered or hired, thus preventing you from falling for invoice fraud. However, the Association of Certified Fraud Examiners reports that US businesses lose as much as 5% of their annual revenue to invoice scams, with affected organisations losing over 1.5 million dollars per case, on average.

It’s safe to say—but isn’t safe for small business owners—that invoice fraud is a widespread threat. Protecting your business from potential scams is a must, whether you run a click-and-order store with hundreds of online customers or a solopreneur selling pre-owned Rolex watches.

Find out the various forms of invoice fraud in the next section.

The Most Common Types of Invoice Fraud

Invoice fraud comes in different types. However, all of its forms involve misrepresenting goods or services, and target victims are made to owe some payments. 

Invoice fraud takes many different forms, so you must familiarise yourself with each type. That way, you will know what it takes to protect your small business from it.

Note: Be careful not to use the list below as a loose guide, as evolving scammers might develop new tricks. But for your reference, here’s a quick rundown of the most common types:

1. Business email compromise (BEC)

BEC scam is one of the most common types, which can strike any small business via email. In this case, a fraudster pretends to be your legitimate supplier to whom you owe a payment. The emailed invoice from this scammer looks authentic, even referring you to the correct amount owed. However, the recipient’s payment details are actually false to divert your payment from the real supplier.

2. Fake invoices

It may sound unlikely that businesses pay out on random invoices. But the truth is that millions of dollars are lost to fictitious bills almost every year. Unlike BEC scams with legitimate products/services but fake invoices, this type of fraud has no products sold or services rendered. Still, some startups and small companies end up paying for these bills as they don’t have enough human resources (HRs) to examine each invoice received.

3. Duplicate invoices

Duplicate invoice fraud occurs when a provider bills you twice for the same product or service, either accidentally or intentionally. At first glance, it may appear to be a little error, and it is occasionally just that. However, if you observe it happening regularly with the same vendor, it may indicate a larger problem, such as a dishonest attempt to raise their profits.

To avoid this, it’s a good idea to have mechanisms in place that detect and prevent repeated payments. To avoid being a victim of this fraud, thoroughly review invoices, note what you’ve previously paid, and communicate with vendors about any duplicate charges. If the events continue, it may be worth reconsidering your relationship with that provider to safeguard your company from excessive costs.

4. Overcharging

Overcharging scams are closely related to duplicate invoice scams, but there are some differences in how they work. Unlike duplicate invoices, the overcharging scam leverages an actual unpaid invoice with fraudulent modifications of the products or services provided or their cost. These scams can be easy to fall for as nothing may stand out as being out of place on the face of the invoice.

For example, an overcharging scam invoice might contain higher V.A.T. then it should or may contain the correct figures for each unit of a product you ordered but a total cost that is higher than the sum of these items. To spot these scams, you’ll need to thoroughly review each invoice, taking the time to run through each figure and calculate yourself.

5. Phishing scams

Phishing invoice scams differ in that they do not always take your money immediately away. Instead, they are intended to steal vital information or install malware on your system, putting your data and security at risk.

Look out for invoices that require you to click on links to pay or for more information; these can be red flags. Scammers use this technique to deceive you into disclosing sensitive information or infecting your network, so always double-check before clicking on anything suspect.

Discover the alarming signs of invoice fraud in the next section.

Common Telltale Signs of Invoice Fraud

Now that you understand the different types of invoice fraud, it’s also crucial to identify their alarming signs. That way, you can prevent or avoid them at all costs or take immediate action to stop them.

Detecting invoice fraud is not always easy since fraudsters try hard to conceal their activities. However, you can stay ahead by learning to spot the warning signs.

To spot potential invoice fraud, be on the lookout for the following:

1. Unfamiliar vendors or suppliers

It’s crucial for small business owners to know their third-party providers, whether material supplies or logistic partners. Should you receive an invoice from a vendor you don’t recognise at all, tag this bill as an instant red flag and proceed with extra caution. Check your business records to see if you order products or hire services from these sources. Ultimately, it’s better for your small business to stay safe than sorry!

2. Incorrect details

The best practice is to review each invoice you receive in thorough detail carefully. Any discrepancies (such as higher prices than expected or mismatches between itemised charges and the total amount charged) should trigger deeper investigations. You should scrutinise past invoices from this vendor. Such discrepancies may be the fruit of genuine errors, but they may also point to a pattern of fraud.

3. Inconsistent formatting or appearance

Unusual formatting, inconsistent logos, misspellings, or strange fonts are common giveaways that something is wrong with an invoice. Keep in mind that legitimate invoices usually have standard templates to follow. They typically have usual logos, consistent branding elements, and clear contact details. If something looks odd or off, wait to pay till you’re sure who exactly you’re paying to. 

4. Requests for payment through unusual methods

If a supplier requests payment through unfamiliar or unconventional methods, such as wire transfers to foreign accounts, cryptocurrency, or personal accounts, be extra cautious. Sudden requests to use different payment methods are the hallmark of BEC scams. In these cases, you should immediately reach out to the vendor through their previously established lines of communication to confirm the authenticity of the request.

5. No supporting documentation

As a business owner, you usually see supporting documentation with each and every invoice. Of course, most invoices generally come with supporting documents like sales orders and delivery notes. But if your invoice doesn’t have one like you used to receive, don’t treat it as a sign of carelessness but a potential fraud. So, when dealing with third-party providers or vendors, always ask for supporting documents before processing payments.

Learn how to avoid and handle invoice fraud in the next section.

4 Key Steps To Take for Preventing Invoice Fraud

Identifying fraud types and telltale signs is one thing; Protecting your small business from them is another. Of course, knowing how to spot fraud attempts and take urgent steps can help you rise above any potential invoice scams. 

It’s best, however, to implement best practices in identifying, preventing, and handling potential invoice fraud. That way, you can avoid risking your small business and compromising your finances. Here’s how:

1. Implement a multi-factor payment approval process

A multi-factor payment approval process means more than one person reviews and approves payment requests. This step guarantees that your invoices are double-checked to catch potential mistakes or deliberate scams. If your small business has a handful of employees, consider requiring multiple levels of verification before you process any payments. With more people involved, your team can promote financial oversight and prevent potential fraud.

2. Standardise communication channels with vendors

One of the simplest ways to prevent invoice fraud is to create and maintain consistent communication with vendors. This step will make it easy to spot unusual attempts at communication, which may be indicators of BEC scams. If you receive an invoice or payment request from a new email or phone number, verify its authenticity through the existing communication channels before taking action.

3. Limit public access to vendor information

Invoice scammers can pose as one of your frequent suppliers because they have some idea who those suppliers are. To beat this threat, protect sensitive vendor details by avoiding sharing this information too broadly, even within your organisation.

4. Conduct regular employee training

Regular training is the key to success, which essentially applies to promoting business protection. As such, offer your employees with ongoing training programs on privacy and security. Specifically, orient them on invoice fraud types and signs as well as train them to address any potential scams. You may also consider creating a whistleblower policy to prevent internal fraud. Ultimately, the goal is to protect your small business from fraud. 

Utilise Invoice Management Software

Purchasing trustworthy inventory and invoicing management software is a smart move. Tools like InvoiceBerry can identify invoice issues, such as duplication or mismatched inventory. If you’re interested in learning how online invoicing compares to manual invoicing, see this information on the benefits.

Depending on your industry, you may even find specialised software such as RealSteel and ERP software for the steel industry. These provide highly complex integrations that allow you to manage nearly every business process from a central dashboard, making invoice scams much easier to spot and thwart.

Final Word

Invoice fraud has become widespread among various businesses across different industries. As such, your startup or small enterprise might fall prey to its various forms. That could cost you your business finances, brand reputation, and customer support.

As a small business owner, familiarise yourself with the different types and telltale signs of invoice fraud. More importantly, take the crucial steps above to protect your small business from them. With all these in mind, you can prevent, avoid, and even handle any invoice scams.

Remember to apply these practical tips and steps, and don’t hesitate to seek professional help from a CPA if needed. For more invoicing tips, here are the top invoicing mistakes to avoid.