October 5, 2023

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.”

Just as a football team relies on every player’s commitment and passion to achieve victory, an organization thrives when its employees are fully engaged. Re-engaging employees is like reigniting the spark in a team that has momentarily lost its momentum. It’s about tapping into their potential, revitalizing their spirit and reminding them of their vital roles in the collective pursuit of success.

While a dedicated and motivated workforce can be a company's most valuable asset, the inverse is equally true—disengaged employees cost a business a lot of money and time. When team members are not fully invested in their work, productivity wanes and operational costs soar.

Here are four lessons that every credit leader can learn from football to energize their teams and score business success:

#1 Teamwork and Collaboration

Just as a coach strategizes to rekindle team spirit on the field, credit managers must craft thoughtful approaches to inspire and re-engage their workforce. When employees are engaged, they work cohesively towards common goals, fostering a sense of unity that propels the entire organization toward victory after victory. Credit leaders can emphasize the importance of collaboration, emphasizing that every team member—within the credit department and across all departments—plays a crucial role in reaching collective goals.

Derrick Swaney, credit specialist at MiTek, Inc. (Chesterfield, MO), said his company holds an annual conference for the credit department and departments adjacent to it to discuss overall performance and connect. “One of the biggest problems I’ve seen is difficulty in communication and the mentality of only helping others when it’s convenient for them or benefits them since they have their own agendas to focus on,” he said. “But if they are able to put a name to a face and get to know the person, they’re more willing to help them.”

Team building should be intentional, but some of the best team-bonding moments can happen spontaneously. Jason Mott, CCE, NACM Board director and corporate credit manager at MFA Incorporated (Columbia, MO) took his entire credit team that works in the home office mini-golfing last Friday as a way to thank them for their efforts this past fiscal year. “I try to come up with things like that throughout the year but it’s not really on a set basis, it’s just more sporadic,” Mott said. “If we have a win as a team, I try to celebrate that together.”

#2 Set Clear Goals and Expectations

In football, the objective is clear—score more points than the opponent. Credit leaders should set clear, achievable goals for their teams, providing a sense of purpose and direction that motivates employees. For the credit department to be successful, the credit manager must ensure that everyone knows what is expected. Make sure everyone on his credit team has a clear outline of their role and that everyone recognizes it. “I think it’s important for a leader to assign the roles and make sure that everyone feels appreciated for their role, no matter the level,” Swaney said. “This incentivizes employees to continue working and be more efficient in their position.”

#3 Continuous Training and Development

Football teams continually train and refine their skills to stay competitive. Similarly, business leaders should invest in the ongoing training and development of their employees, fostering a culture of growth and improvement.

To make sure that credit staff remain engaged and improve their performance, you must provide them with career advancement opportunities. Mott incentivizes his team with NACM educational programs and conferences. “If my team is willing to put forth the effort to gain credit expertise and move into the Professional Certification Program through NACM, the department will pay for their registration and attendance at NACM’s Credit Congress,” Mott said. “The reason I do that is because it makes the individual an asset for the credit department and therefore improves the department’s performance. If attending Credit Congress is something my team wants to do, we’re happy to facilitate that. I would just like to have them move forward in their professional designations as a part of that process.”

#4 Celebrate Wins

Just as football coaches celebrate touchdowns and exceptional plays, leaders can recognize and reward outstanding achievements within their organizations. These rewards can come in the form of bonuses, vacation days, recognition or a hybrid schedule. Be sure to tailor the rewards to individual employees to make them feel more intentional. “Before COVID, people were more focused on appearances and being in the office, but now people are more focused on output,” Swaney said. “I think that’s kind of shifted to people wanting to just show what they’ve done. If they get everything done, they don’t really feel the need to sit in the office and make their presence known. Rewards of flexibility are critical in motivating people to get work done.”

How you deliver those wins is key in making them effective. “For my staff, I'll start by telling them about what I think they're doing well and then I’d go ahead and tell them about what they can improve on moving forward,” said Ron Sereika, CCE, director of credit and client payment solutions at Mspark, Inc. (Helena, AL). “But if you start out with the negative, then people just shut down and they're not going to be open to listening to where you think they could improve. I also take into account the employees with much more challenging accounts who may not be performing as well as those with easier accounts that are performing well above average."

NACM’s Credit Managers’ Index (CMI) gained 1.8 points to 52.6 in September. The improvement is welcome, but the CMI appears stuck on the precipice of a recession in business activity, said NACM Economist Amy Crews Cutts, Ph.D., CBE.

“Over the first nine months of 2023, the CMI has been bouncing around levels suggesting business activity is about to decline, up one month and down the next,” Cutts said. “At present, I think we are balanced in the overall risk of a recession starting in the next few months, but with the delayed risk of a government shutdown, the contagion of employee strikes in several industries and rising oil prices, things could turn quickly to the negative.”

The index of favorable factors improved 5.3 points to 58.6, led by a 9.2-point jump in sales, a 6.5-point jump in the amount of credit extended and a 5.4-point jump in dollar collections. The sales index has been the most volatile in 2023 with massive declines followed by equally large improvements each month.

Unfavorable factors fell deeper in contraction territory with a 0.6-point drop to 48.7, marking its fourth consecutive decline. Four of the six unfavorable factors fell in September. The dollar amount of customer deductions fell 3.5 points to 47.4, disputes fell 2.5 points to 47.3 and rejections of credit applications fell 1.1 points to 49.2.

“When supply chains were broken due to the pandemic, we saw disputes rise because no one wanted to pay full price when it took months to get the products or services,” Cutts said. “But now supply chains are functioning again and order backlogs are catching up, yet we are seeing a rise in disputes collection referrals. This is indicative of stress on businesses.”

What CMI respondents are saying

• “Sales are up due in part to price increases that include an increase in deductions. We have seen a rise in cost of business fees from our customer base simply to continue to do the business with them.”
• “Market price for resin is lower and there is increased purchasing by customers.”
• “The increase in orders is cyclical. As we approach the holiday season, orders increase. Retailers are impacted as the Fed continues to lower inflation and slow our economy.”
• “Supply chain issues are starting to ease. We are shipping lots of backlogged orders. Dealers continue to stock higher levels of inventory.”
• “Collections are very good. More customers are paying in advance fully or partially. More payments being made by ACH and credit card. We had needed fewer lien filings.”
• “There has been a seasonal pickup in sales with back to school. Sales are improving, but we are experiencing more slowness with smaller, independent food service operators.”
• “Most of the increase in volume is attributed to tax-supported schools going back in session. Commercial accounts are stagnant or down and collection woes continue.”

Why should you participate in the CMI?

Credit professionals can use the CMI results to make more informed credit decisions and validate their gut feelings. “When I see CMI results saying sales or payments are starting to decline, I know we’re going into our slower season,” said Cathy Klein, controller at Crystal D (Saint Paul, MN), who has actively participated in the CMI for almost 20 years. “That’s when we ramp up our collection calls to stay ahead of the curve.”

Complete the CMI every month for the next 12 months and automatically be entered into a drawing to win a gift card worth between $100-$250 in 2024. Sign up to receive monthly CMI survey participation alerts. For a complete breakdown of manufacturing and service sector data and graphics, view the September 2023 report. CMI archives also may be viewed on NACM’s website.

What a week. The Republican-led House continues to demonstrate that it isn’t afraid to flip the table as it attempts to redefine “business as usual” in the House. First, a recap of the shutdown showdown.

Shutdown (or lack thereof) Recap

Speaker Kevin McCarthy, over the first two weeks of September, suffered a series of embarrassing floor votes as his own party shot down multiple strategies to keep the government open. With less than a week to the shutdown, McCarthy was forced to accede to the demands of hardline conservatives by agreeing to bring up each individual appropriation bill, despite knowing that they would be dead on arrival in the Senate and that he likely couldn’t even pass them all. After a long week, House Republicans passed three appropriations bills while another failed to pass on the floor, leaving eight to be considered with one day before the shutdown.

Meanwhile, the Senate negotiated and was poised to pass a bipartisan continuing resolution Saturday afternoon that would keep the government open through Nov. 17. With no pathway forward to reconcile the House approach and the Senate bill, a shutdown seemed imminent. The sentiment in the House was that there were 10-15 hardline conservatives who just wanted to shut down the government, while the vast majority wanted to pass the bipartisan Senate bill. However, McCarthy’s hands were tied, as many of those same conservatives promised to remove him from office if he negotiated with Democrats or put up the Senate bill for a vote.

On Saturday at 11:45am, Speaker McCarthy decided to call their bluff. He announced that the House would vote on a slightly modified version of the Senate bill under an expedited procedure that would require two-thirds of the House to vote yes. The bill was rushed to the floor, and after Democrats stalled for an hour to give their members time to review the text, it passed with a overwhelming vote of 335 to 91, far exceeding the two-thirds threshold. The Senate passed the bill later that evening and President Biden signed it in time to avert a shutdown. For now.

No Good Deed Goes Unpunished

With the government funded, Speaker McCarthy’s strategy to appease conservatives was to cancel the October recess and finish bringing up the remaining eight appropriations bills. He gambled that, in doing so, along with opening up an impeachment inquiry on President Biden which he started in September, he could hold on to his job as Speaker.

That gamble ended up backfiring. On Monday, Rep. Matt Gaetz filed the motion to vacate the Speaker, setting up a mandatory vote within two days. Democrats unified in opposition, making it clear they would not save McCarthy’s speakership. Intent on ripping off the bandaid quickly, McCarthy scheduled the vote for Tuesday, hoping to win the vote and move forward quickly.

The first sign that McCarthy was in trouble came when 11 Republicans joined all Democrats in defeating a procedural effort that would have tabled the motion to vacate. He could only afford to lose around five or six. Then, as the clerk called the roll alphabetically on the motion to vacate, McCarthy had already lost five Republicans by the C’s. From then on there were no surprises—Democrats held firm, no Republicans changed their votes, another three Republicans voted to vacate. McCarthy was officially ousted as Speaker of the House by a vote of 216-210. Later that night, in another surprise, McCarthy announced he would not seek to be re-elected as Speaker of the House, opening up the field for new candidates to run.

So … What Happens Next?

Until a new Speaker is selected, the Patrick McHenry from North Carolina will preside as Speaker Pro Tem. He announced that the House would recess until next week to give candidates time to announce, whip votes and for the Republican party to hopefully avoid another 15 vote-o-rama to decide McCarthy’s successor.

The frontrunners as of Wednesday are the current Majority Leader, Steve Scalise from Louisiana, and Chairman of the Judiciary Committee Jim Jordan from Ohio. Scalise is well established, well liked, but may not be enough of a departure from McCarthy to win over the hardline conservatives. Jordan, founder of the Freedom Caucus, is likely to win the more conservative Members of the party, but will have to work hard to convince moderates he can effectively lead the House. Others may emerge as candidates, but will have a hard time overcoming the lead and established base that Scalise and Jordan have.

Even if a new Speaker is elected next week, they will have to confront the exact same situations that brought down McCarthy in November, when the current continuing resolution expires on Nov. 17. Technically, House rules are vague on how much power McHenry has, so if the race for Speaker drags on, McHenry could temporarily lead the House through that deadline, but most think this is a long shot.

In short, we could be looking at another shutdown situation in November.