These new findings show 46% of small business loan applications reflect signs of first-party fraud and AI-driven scams that are projected to cause $40 billion in losses by 2027. We have never seen such a loud call-to-action to ensure FI’s enhance their small business lending fraud detection. So, it's no surprise that 64% of institutions are already planning to increase their investments in fraud prevention by the end of 2025.
Tackling top small business lending fraud trends
To effectively defend your FI and fight back against these rising threats, it's essential to understand the current SMB lending fraud landscape. Specifically, lenders are increasingly facing sophisticated scams that can be difficult to detect with traditional underwriting and fraud-detection methods.
- Synthetic identity fraud is when a borrower creates a new identity with a combination of real and fake information. These identities often pass basic identity checks but can be spotted if you look for inconsistencies across multiple data sources.
- First-party fraud is when a legitimate borrower intentionally misrepresents information, like business revenue, to qualify for a loan they wouldn't otherwise receive.
- AI-powered scams, while obvious from the name, is when fraudsters create highly convincing fake documents, work together at scale, or both.
For SMB lenders, the best offense always starts with a strong defense
Given the evolving and varied nature of these fraud threats, a proactive, multi-layered approach to SMB lending fraud detection is crucial. Here are some key strategies for financial institutions:
- Adopt real-time data analysis: Waiting for a manual review of an application or applicant documents is often too slow for the speed of lending. Using systems that analyze applicant data in real-time allows FIs to flag suspicious patterns quickly.
- Understand that small business lending is unique: Unlike consumer or commercial, for SMB lending the owner(s) are intertwined with the business. Therefore, FIs must perform KYB and KYC during the application process.
- Enhance reviews with integrated third-party data: Integrate with third-party data to create a full picture of your applicant. Smartly done, this integration shows patterns across your data, and third-party data, which flag inconsistencies to spot fraud.
- Implement a flexible rules engine: Fraudsters are constantly changing their tactics, and you should be able to also. A customizable rules engine allows lenders to adapt their fraud detection settings for different loan types and applicant risk profiles, helping them stay one step ahead of emerging threats.
- Safely share data: Fraudsters share data, so why not Fis? By partnering within a trusted lending network and sharing anonymized applicant data, lenders can make smarter decisions when they work together.
Rethink your small business lending strategy if you're starting from scratch
If you're an FI who has yet to extend into small business lending, but does consumer or commercial, another less risky option is to look for Embedded Lending solutions. These solutions let you offer SMB clients an option to apply for financing, without your institution taking on the loan, and also providing your FI an option to gain from the referral.
Building a Stronger Future for SMB Lending
Fraud in small business lending isn’t slowing down—it’s accelerating in scale and sophistication. For financial institutions, the stakes are higher than ever: reputational damage, regulatory risk, and billions in potential losses. The good news is that with the right technology, partnerships, and proactive strategies, FIs can turn today’s challenges into an opportunity to build stronger, smarter lending programs.
Interested in learning how we can help you to prevent SMB fraud? Or interested in Embedded Lending solution as a low-risk SMB entry point? We'd love to understand your needs. Please fill out the form below and we'll be in touch.