Funds and fabrications: The dangers of committing fraud when applying for business funding

Funds and fabrications: The dangers of committing fraud when applying for business funding

In the competitive business landscape, securing funding is often a critical step towards growth and sustainability. However, a darker side exists as some businesses resort to fraudulent activities to secure finance. Businesses should be aware that honesty will have the best result when applying for funding.

“There are some common fraudulent activities that businesses engage in, often sparked by financial distress, and primarily involving inflating assets and financial statements to attract a lender,” says Melinda Lourens, Director at Rodel Bridging Finance.

While some lies go undetected, the reality is the risk is often not worth the reward, with reputation and future opportunities for funding on the line.

Lying on paper

Businesses may exaggerate their revenue, profits or client base to create a facade of financial health.

“Distressed clients have been known to submit different financial statements. One set is sent to the shareholders reflecting the actual position of the company, while another set is sent to the lenders reflecting “adjusted” liabilities, which have really been decreased and assets that have been inflated,” adds Gary Palmer, CEO of Paragon Lending Solutions.

Making mistakes

Some businesses will purposefully misrepresent themselves, but others make errors by mistake. This can happen if working with ill-equipped accountants and auditors. Even if unintentional, as human error can play a role, if there are discrepancies found in financial statements it can lead to delays in processing funding applications and can also damage a business’ reputation among funders.

It’s also best to disclose any previous issues to funders instead of omitting or lying about past indiscretions. A funder is likely to find out anyway, which is why honesty upfront goes a long way.

Acting dishonestly

Creating fictitious contracts to showcase a strong demand for products or services is an example of how some businesses might attempt to secure funding dishonestly. Others might overstate the value of tangible assets.

“A client applied for a facility off the back of a commercial property as security, based on his submitted property valuation. He didn’t know we were aware of his previous application for the same funding from a major bank, including a valuation by the same agent from just days earlier. The property’s value had suddenly increased by millions in the new valuation, clearly indicating fraud,” Lourens adds.

Dishonest businesses may try to hide existing liabilities and debts when applying for funding by omitting certain financial obligations or understating the extent of existing debts. “This is easier to find as it becomes harder to hide through compliance checks and balances,” says Palmer.

In extreme cases, businesses may engage in identity theft or present false credentials to bolster their funding applications. This could involve using fake references, inflating the qualifications of key personnel, or even assuming the identity of a successful business to gain credibility.

“The truth will come out as lenders enhance due diligence on applications. Accurate information about a company and its financial obligations enables the best funding opportunities and most favourable repayment terms,” Palmer notes. “And funders want to repeat business with good clients, which is why honesty from the get-go can make all the difference in a long-term relationship with a funder.”

Unfortunately, criminals can creep through the cracks…

Money laundering, while easier to detect with technology, is still an ongoing problem.

“A client approached us for bridging finance off the back of the pending sale of his property, but on closer assessment, there were red flags. His young age, employment history and financial status didn’t align with owning the luxury property, which was purchased just a year prior for several million but was being sold for almost half the price. His ties to government were also suspicious and so we declined to bridge the deal. Unfortunately, another lender went ahead and lost a few million in the process,” says Lourens.

Some businesses “get away” with behaving unlawfully but for others, the situation will catch up with them sooner or later. “If you are found to have attempted fraud or to have lied about it, it is highly unlikely that any lender will work with you or any business you are involved in,” says Palmer.

“Fraudulent activities in business funding applications undermine the integrity of the financial system, crucial for healthy economic growth,” notes Lourens. “This is why it’s essential for lenders, investors, and regulatory bodies to remain vigilant and implement robust due diligence processes to detect and prevent fraudulent applications and practices wherever possible.”

“Business owners should prioritise transparency and ethical conduct, while recognising that short-term gains through deceitful means can lead to severe long-term, reputational consequences, which are certain to impact a business’ longevity,” Palmer concludes.