Less than one month since I shared on my blog a post about how to avoid business scams, our company was the victim of one. I share the details with you to perhaps save your company from a similar fate.

The issue began back in March when one of our outside salespeople received a fax from a company in a state in which we do not do business, asking for a quotation. Our salesperson faxed back pricing and, low and behold, received a purchase order without ever talking to the “customer” or negotiating the price. I was not informed of this as I would have definitely smelled a rat. No contractor buys something without at least a little haggling about the price. And no one I know does business with a new company solely via fax. Had I been informed of this at that time, I would have killed the deal immediately. However, the downside of having nine locations is that I don’t know everything that is going on at each of our branches.

Our salesperson got this new “customer” to fax in a completed credit application. Our credit manager faxed out credit reference forms to the three companies they listed as references and promptly got an extremely positive response from all three. This was warning sign number two. It normally takes several attempts to get a credit reference to complete our credit check form. When all three companies responded quickly, and with glowing reports on this prospective new customer, another red flag should have gone up. Again, I wasn't informed of this. (It appears all three credit references were for fake companies with fax numbers set up by the so-called customer.)

Our credit manager also pulled a Dun & Bradstreet (D&B) report on this company and, while it only had sparse information, there was nothing negative about it and the D&B report said that it averaged paying its bills only two days past the due date. Based on the company's credit references and the D&B report, our credit manager set it up with a $5,000 credit line and this new “customer” made a $3,000 purchase at a much higher-than-average gross margin. Red flag number three.

Less than a month later, and before the initial purchase was due, the customer faxed in another request for quotation. Our salesperson, thinking he had lucked into a sheep he could fleece, put an even higher gross margin on his second quote and, to his surprise, he received another PO via fax. His quotation was for almost $20,000 this time, at a 44% gross margin, in an industry where gross margins in the 20’s are the norm. As this purchase would be over the customer’s $5,000 credit line, our salesperson spoke with our credit manager who, based on the previous false information obtained during the initial credit check, increased their credit line, and approved the sale.

When the initial purchase wasn't paid in 30 days, our automated system sent a nice letter asking if the payment had been overlooked. At 45 days, our automated system sent a slightly more pointed letter asking for payment. At 60 days, our credit manager called this customer only to find that the phone line had been disconnected. At that point she did a Google search on their company name and found multiple companies complaining about having been scammed by this company. At that point her stomach sank and she informed me that it looked like we had been the victim of a scam.

We have since filed a complaint with the police department in the town listed on their credit application. The police told us that the FBI is involved as this company is being investigated for allegedly scamming more than 30 companies out of more than $3 million combined in merchandise. We lost nearly $13,000 in merchandise. Yes, there is some chance that the FBI will find these people and recover our merchandise, but I’m not very hopeful of that.

We now have a policy in our procedures manual. It states that no one is to sell an out-of-town company unless we receive payment via wire transfer or a certified check, prior to our shipping the materials. I hope that by sharing this embarrassing episode it will save even one of you from the same painful experience.

Are you aware of any other potential scams? Share them in the comments section below.

Jim Sobeck is president of New South Construction Supply, West Columbia, S.C., and author of the Biz 101 blog at http://jimsobeck.tumblr.com. Contact him at [email protected].