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Thorough background checks can protect businesses against debt, fraud

Barnaby & Wolfe regularly assists clients in responding to unresolved financial disputes. According to firm president Joe Noland, background and credit checks should always be an integral part of a business’s hiring and vendor selection process.

“We recommend finding a collection agency that provides these services for free,” Noland said.

Business owners must remain vigilant against fraud from outside entities, internal staff, and independent contractors. It is much easier to protect against being misled when operating with a complete picture of the other party’s work and financial history.

Independent contractors are useful in many types of business. Where a full time, traditional employee requires a constant stream of work for maximum per-dollar value, a contractor is generally hired to complete a specific job, with no additional ties to the employer.

“It’s been difficult to predict the future in terms of the strength of the economy,” Jeff Ready, CEO of Scale Computing, told the New York Times. “You have to be very prudent in how you hire. What I’m doing is trying to keep a smaller in-house contingent and supplement it with contractors based on the ebbs and flows of how much business we have.”

Often only connected to a business for a single project, it is critical that contractors go through some type of verification process to determine work history and trustworthiness. Employers should look for contractors with strong references, and avoid hiring anyone who has been sued for not completing a job in the past.

Businesses that frequently use the services of contractors may eventually need to reclaim money for insufficient work. Collection agencies used for that purpose can often provide addition screening services to prevent future mishaps, according to Joe Noland.

“Commercial collection agencies use resources to help build financial profiles on debtors when they are placed for collections, Barnaby & Wolfe president Joe Noland said. “It is necessary for a commercial agency to gain a full understanding of the debtor’s financial picture before starting their collection efforts.”

In-house employees may require even more scrutiny, as they are afforded more access to company assets and financial materials. John Tschohl, president of Service Quality Institute, told Inc his harrowing story of losing $300,000 to an embezzling bookkeeper.

"Many small business owners are very trusting people who are doing their jobs and creating their businesses," Tschohl said. "The point is there are many people who will rip you off left and right."

Tschohl’s employee brazenly wrote herself checks for thousands of dollars, taking around $20,000 a month. Much of the money was lost at nearby casinos. Had the bookkeeper undergone a credit check before landing the job, her history may have revealed warning signs, or even evidence of similar past behavior.

Despite the benefits of conducting background checks, Barnaby & Wolfe says that employers must tread carefully to avoid accusations of discrimination. Forbes reports the Equal Employment Opportunity Commission is cracking down on those who deny employment to convicted criminals.

Under the guidelines, employers must demonstrate its criminal background exclusion policy “operates to effectively link specific criminal conduct, and its dangers, with the risks inherent in the duties of a particular position.” While this could allow an employer to block a person convicted of embezzlement from working on the company books, it may not be sufficient to keep the same person from hiring on in a different department.

Requiring a credit check and thoroughly examining references can provide a work-around, but business owners should be careful to avoid learning any information that could open the door to a discrimination lawsuit.

Companies are not so limited in selecting vendors who can receive credit. Vendor financing, the practice of lending customers money to buy product, or extending other forms of credit to vendors and customers can expose a company to the risk of fraud or default.

“If you are an unsecured creditor, and your client defaults on their credit terms, you have no collateral and your options are limited,” Joe Noland said. “Some businesses do not use these methods because these types of service can be costly.”

Noland advises Barnaby & Wolfe clients to perform due diligence before extending credit in the form of money or product to a vendor. He warns that if a company must borrow money or take product on credit, collection efforts will likely prove fruitless.

Noland suggests collection firms can help avoid costly unpaid loans.

“Sometimes businesses do not want to know in fear it may cost them the vendor,” Noland said. “Background checks when providing terms are not intended to turn business away, but help a company determine what terms to offer and to protect you as an unsecured creditor,”

Trust is essential to functional business. Whether hiring a one-time contractor or giving a vendor product on credit, a business owner must have confidence money will not be misspent, and debts will not go unpaid. Although background and credit checks are a good line of defense, businesses must be mindful of lawsuit dangers. For many, debt collection firms like Barnaby & Wolfe can provide background and risk assessment services as part of their client relationship.

Samantha Nash contributed to this article.