Scams for Small Businesses to Watch Out for

Fraud against small businesses increased from 1990 to 1996, the last year for which there is complete data. As the number of new businesses grows, there are increasing opportunities for the business fraud industry. When many entrepreneurs start a business, they are often inexperienced in dealing with the variety of business decisions that need to be made, and as a result are vulnerable to scams. The exact number of frauds against small businesses is unknown but the Council of Better Business Bureaus, Inc. has found that there has been an increase in the number of complaints about practices that typically target small businesses. For example, complaints against businesses that promise capital upon payment of a fee have doubled from 1990 to 1996 to 11,700. There are many suspicious business dealings to watch out for, among them are:


  • Offers to start a franchise operation at home are generally suspect. Such businesses advertise expected earnings and provide names of successful franchisees that are part of the business scam.
  • "Paper Pirates," as they are called by law-enforcement officials, call small businesses to sell copier paper and supplies that are overpriced and ultimately not delivered. These "pirates" also call to offer service contracts on office equipment that are billed as "renewals" or "upgrades," giving the impression that a business requested the service. Also, beware of people calling and requesting registration numbers of office equipment. These numbers may then be used to create false invoices that often appear legitimate.
  • "Slamming" occurs when a telephone user?s long-distance line is switched from one service to another without permission. "Sliding" is a similar problem that occurs when a user changes long-distance service but unknowingly also gets the local toll-call service switched.
  • Capital for a fee is an old fraud business. The scam involves a person posing as a financial expert who offers capital for an advance fee to cover the costs of the capital transaction, which never materializes.
  • Inventors, wishing to sell their inventions, are also targets. These businesses call themselves invention promoters who offer to promote inventions for fees, often running into thousands of dollars, and promise to find buyers for inventions. Few inventors ever realize a sale. Less than 1% of new-productideas are successful in the marketplace. But invention promoters and marketing firms tell their clients that their creations are patentable with large market potential.

Recently the federal government set up a $250,000 redress fund for inventors who were victims of invention-promotion fraud. The Federal Trade Commission has settled a case against several invention-promotion firms charged with selling false promotion services to inventors trying to market their creations. The US Patent and Trademark Office believes that of the hundreds of invention-promotion firms, fewer than a half-dozen are legitimate. A spokesperson for "Project Mousetrap, " the 1997 FTC program that investigated corrupt firms, states that any inventor seeking a promotion firm has a right to demand the firm?s success rate, insist on examples, and check to see if the inventions are available in the market. The spokesperson went on to offer his advice, "If they are overly excited about how great your product is, be leery."


Source: The Wall Street Journal, May 21, 1998 and December 1, 1998




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