Merchants are legally obligated to obtain a supplier’s agreement if they are reselling goods through any channel. However, often times the last thing on a merchant’s mind when thinking ahead to driving revenue is the chance of encountering a wholesale supplier scam — but it can, and does, happen. Wholesale supplier scams can occur in many ways, but the most important thing to remember is that your supplier is ripping off you AND your customers. Today we’re going to take a look at a few common types of scams and offer tips on how to spot and avoid them to protect yourself and your business.

Different Types of Supplier Scams

In the process of buying wholesale goods, there are a few key opportunities where suppliers can take advantage of your business to boost their own profits.

The Drop Ship Scam

There was a time not long ago when wholesale suppliers that would drop-ship on your behalf were rare, but that is in the past. More suppliers now offer to drop-ship in order to better accommodate the online channel and take advantage of demand outside their traditional stock and carry houses.

On the other hand, some suppliers offer to drop-ship in order to scam buyers—they accept their payment without shipping their orders. Here is how a drop-shipping wholesaler scam works:

A customer purchases an item from your website or online marketplace channel.

Your wholesale supplier receives notices of the purchase and does not ship the goods.

Your customer contacts his or her credit card issuing bank for a refund, which results in a chargeback for your company.

You pay chargeback fees, refund the money, and continue to pay your wholesale supplier who is scamming you out of money.

When drop-shipping suppliers fail to send out your goods, you not only lose the money you paid to the supplier for the goods but also the fees you paid for failing to ship.

The Replica Goods Scam

This scam is simple to understand. You sign a supplier agreement with a company assuming the goods they provide are authentic and legitimate—a commonly seen example is fashion accessories: Louis Vuitton, Prada, and Dolce and Gabbana. However, what you actually receive are replicated goods that you then ship to your customers.

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Once your customers receive their packages, they may identify the replica and contact their issuing bank for a chargeback. A worst-case scenario—your customer may sue you for fraud.

The “Pay Now, Get Later” Scam

This scam preys on merchants who are often just starting out or who may just be naive. The way it works is that you issue a PO with your supplier for a new shipment of goods. However, the company says that you must pay first before they will ship. There may be a variety of “reasons” for this, such as the product being back ordered and a pre-payment is required to get in line for stock. You pay the invoice yet you never receive your shipment to refill your own stock.

Of course, one of the challenges with this situation is that it’s not entirely uncommon for a supplier to ask for payment early. Many retailers don’t have the option to fight Net 0 payment terms and, in reality, won’t know it’s a scam until it’s too late. Just try to make sure that, at worst, you get a shipment confirmation before you pay an invoice.

Spotting Wholesale Supplier Scams

Now that you understand the different types of scams, it is important to learn how to spot them. Below are red flag signs that will help you avoid falling victim to a supplier scam.

Communication Red Flags

Being able to easily communicate with your supplier is a key part of doing business. You want to be able to quickly reach them if an issue occurs so that your orders can proceed.

For that very reason, suppliers who scam often have poor communication practices. They need to make it difficult for you to contact them so that they can scam you without consequence. Here are a few communication red flags to look out for:

The supplier does not have any contact information on their website, making it very easy for them to disappear with your money and leave you with no way of contacting customer service.

Similarly, the wholesale supplier may also provide phony contact information, which will also leave you with no method of contact.

When you contact the supplier, the person who answers does not state his or her name or the company name, making you feel like you are calling an individual’s private number and not a business, which you probably are.

Without notice, you can no longer contact your wholesale supplier. It is as if the company no longer exists or never existed in the first place.

Avoid suppliers with poor communication skills as this is often a clear sign of a scammer.

Business Practice Red Flags

Even the most skilled scammers will show small signs of fraudulent activity when doing business with you. Stay aware of these common ways that scammers deviate from standard business practices:

The wholesale supplying company does not require your business ID or tax ID number to conduct business with you. Non-scamming suppliers use the number as a sign that the buyer meets government business standards and is trustworthy, while a scammer doesn’t care.

The company denies your request for samples of products or starts acting strange when you ask for one. This is often a sign of a replica goods scam or some other issue involving low-quality goods.

Your wholesale supplier offers unbelievably low prices—so low that it seems as if the supplier probably will not make any money from your purchase. Instead, they’ll make money by scamming you when you purchase goods.

Watch out for suppliers working around standard business practices to avoid potential scammers.

Verifying Your Wholesale Supplier

Fortunately, there are a few ways you can verify that your wholesale supplier is legitimate. Investigating their website, communication, and business practices will allow you to determine whether they’re legitimate or a scammer.

Check Communication

A primary way of checking a supplier is verifying their contact information. Since many scammers make communication difficult, being able to contact a supplier is a sign of credibility.

Identify the supplier’s full business name and contact information on the website. Note whether the information is transparent on their website or if it’s difficult to find. Call the supplier to see if they answer. If the listed phone number is out of service and you’re unable to contact them, don’t place an order.

Secure, trustworthy suppliers are open with their communication to foster long-term business, so always check the contact information of a supplier to ensure that they’re real and not a scammer.

Check Business Practices

Before you place a significant order, you want to verify that the supplier has solid business practices and won’t scam you in payments or shipping goods.

Start with creating a quality control inspection process for every supplier you’re considering. According to Nathan Resnick, the CEO of Sourcify.com, assessing suppliers’ production is absolutely necessary.

As a company looking to produce overseas, there are certain steps you should always take in production. People often question quality control inspections and I ask, do you drive without car insurance? It doesn’t matter how long you’ve known a factory, you shouldn’t go through a production run without a quality control inspection in place.

As an example of quality control, you might delay immediately using drop-shipping services from a wholesaler that may be prone to replica goods. Instead, you could start by sending the goods to your own warehouse first and establish some rapport before you decide to use their drop-shipping service.

In addition to checking goods, you will also want to inquire about different payment methods for the merchandise. Most scammers prefer Western Union or even bitcoins as the payments are untraceable (although bitcoins have become a more widely accepted payment recently). However, if the supplier accepts credit cards, or better yet checks, then it likely has a merchant account from a legitimate payment processor that has already verified the business.

Check Business Reports

There are plenty of reports for tracking scammers that you can use to check your supplier.

Research the company on sites such as Better Business Bureau (BBB), Ripoff Report, or Scam.com. The BBB can help verify the legal status of the company and will provide information on any claims of fraud.

Complaint websites such as Ripoff Report and Scam.com will show you complaints made by others on these public forums.

Taking these steps will allow you to ensure that the supplier is real and trustworthy or will let you detect a scammer before they can take advantage of your business.

Preventing Future Fraud

If you are scammed by a supplier, don’t immediately assume you’ve lost. There are several actions you can take to potentially reverse the fraud and prevent the scammer from hurting others in the future.

Reach Out to Your Marketplace

If you used an official marketplace to find your supplier—Alibaba, eBay Wholesale Lots— you might be able to reverse the issue. Many of these sites have rules to protect buyers against scam if they report the fraud.

Before reporting the scam, it’s best to familiarize yourself with your marketplace’s official rules.

If you’re using another marketplace, simply search on Google “[your marketplace’s name] fraud policy” to learn about what they define as scamming.

Once you’ve familiarized yourself with your marketplace’s policies, you can determine whether your issue qualifies as a scam and you should be protected. If it does, report the scam to your marketplace so they can take action.

To find another marketplace’s reporting process, search in Google “[your marketplace] report fraudulent seller” to learn how you can take action against your supplier.

Reach Out to the Manufacturer

If your fraudulent supplier is a distributor rather than the manufacturer, one course of action might be reaching out to the actual manufacturer of your goods. While it’s unlikely that the manufacturer will reimburse you for your losses, contacting them may help prevent the supplier from scamming future buyers.

Why? Manufacturers want to ensure that their distributors are conducting reliable, high-quality business. Otherwise, those distributors are likely to lose customers, be unable to buy more supply, and hurt the manufacturer’s business.

With that in mind, manufacturers should be eager to hear about your experience with a fraudulent distributor. Notifying them may start a conversation between the manufacturer and distributor if they are directly linked without other distributors in between. If enough complaints have been filed, it may even prompt the manufacturer to cut off their supply to the distributor.

Report Supplier on Major Forums

To protect other buyers, you can also report fraudulent suppliers on ecommerce forums.

There are a few forums that are specifically dedicated to reporting scammers.

Econsumer.gov is for reporting international scamming incidents. There’s a category for ecommerce to report fraudulent wholesale suppliers.

Supplier Blacklist is an international, user-generated blacklist of fraudulent suppliers.

You can also try posting on industry-specific forums, but be sure to carefully check their rules. Many forums, especially ones associated with marketplaces, prohibit specific seller complaints as spam.

Sharing your experience on forums most likely won’t lead to reimbursement, but it will protect buyers from being scammed by the same fraudulent suppliers in the future.

Stay Watchful to Avoid Supplier Scams

Apply these standards for handling scams and you’ll be prepared to protect your business against fraudulent suppliers. If something seems suspicious or odd, always investigate it. Checking requires time and effort, but it’s better to ensure the supplier is credible than risk dealing with a scam.

For more information on reporting a wholesale supplier scam, check out Wholesale Forum.

This post was written by Meghan Faye Miner and updated by William Harris on May 21, 2018.