Vendor Onboarding Controls: A Practical Fraud Prevention Guide for Scaling Startups

Why Vendor Onboarding Controls Are Critical for Scaling Startups

As a startup scales, the simple list of suppliers managed in a spreadsheet quickly becomes a source of operational friction and financial risk. Initially, tracking payments in accounting software like QuickBooks or Xero is straightforward. But with growth comes a higher volume of invoices and new vendor relationships, and this is the point where cracks appear. An ad-hoc process that worked for five vendors begins to fail with fifty, exposing the company to significant vendor fraud risks, from simple invoice scams to sophisticated impersonation attacks.

Without a structured vendor approval process, you risk burning team time on manual verification, delaying critical purchases, and, worst of all, paying a fraudulent actor. Establishing secure vendor onboarding steps is not about creating bureaucracy; it’s about protecting your runway and building a scalable financial foundation. For more on the underlying principles, see our hub on internal controls for growing companies.

The 'Good Enough' Checklist vs. The Scalable System

For a startup in its earliest days, a simple spreadsheet and a basic vendor due diligence checklist can work for up to 20-30 active suppliers. You can manage by manually verifying details as they come in. However, the tipping point where a manual vendor process breaks is typically around the Seed to Series A stage. At this point, the volume of new suppliers, invoices, and payments overwhelms the informal system, leading to delayed payments, frustrated suppliers, and a heightened risk of error.

The reality for most startups at this stage is pragmatic: you do not need an enterprise-grade system, but you do need a documented process that is more robust than a shared Google Sheet. The goal is to evolve from a simple checklist to a repeatable, semi-automated workflow. This provides a clear, audit-ready trail of your due diligence, answering key questions for investors and auditors down the line about how you manage third-party risk.

How to Prevent Vendor Fraud in Startups: Four Core Verification Checkpoints

To effectively prevent vendor fraud, your onboarding process should be built around four fundamental verification checkpoints. These secure vendor onboarding steps create a layered defense, ensuring you confirm who your vendors are, meet compliance obligations, pay the right entity, and avoid engaging with sanctioned parties. This systematic approach is the foundation of effective third-party risk management.

Checkpoint 1: Is this a legitimate business? (Entity Verification)

The first step in any secure vendor onboarding process is to confirm you are dealing with a real, registered company and not a shell or a front for a scam. This basic identity check is a non-negotiable part of managing third-party risk. The process varies by geography.

• For US companies: Business registration can be verified on the official Secretary of State website for the vendor's state of incorporation. This public record confirms the company's legal name, registered address, and status (e.g., "Active" or "In Good Standing").
• For UK companies: The process is centralized and even simpler. Company registration and status can be verified using the free Companies House database, which provides details on directors, incorporation date, and filing history.

This check takes only a few minutes but provides foundational assurance that your potential supplier is a legitimate business entity. As part of this, you may also need to collect beneficial ownership information to understand who ultimately owns or controls the company, a key step in preventing engagement with illicit networks.

Checkpoint 2: Are we compliant? (Tax ID Verification)

Collecting and verifying tax information is not just good practice; it is a legal requirement that directly impacts your compliance and financial reporting. This step ensures you can correctly report payments to tax authorities and withhold taxes where necessary. The required documentation differs significantly between the US and other regions.

US-Based Vendors

You must have a completed and signed Form W-9 on file before making any payments to US-based suppliers. This form provides their Employer Identification Number (EIN) or Social Security Number (SSN) and certifies their tax status. Having an accurate, signed W-9 is essential for year-end 1099 reporting, and failure to secure it can lead to backup withholding requirements and penalties.

Non-US Vendors

When working with suppliers outside the US, the requirements change. Non-US vendors must provide the appropriate Form W-8 (such as the W-8BEN for individuals or W-8BEN-E for entities) to certify their foreign status for US tax purposes. This documentation is critical for determining if you need to withhold a portion of the payment for the IRS.

UK and EU Vendors

For vendors based in the UK and European Union, the key identifier is the VAT (Value Added Tax) number. You can verify UK and EU vendor VAT numbers using the official VIES (VAT Information Exchange System) database provided by the European Commission. This real-time check confirms the validity of the VAT number, helping to prevent invoice scams involving fraudulent tax charges.

Checkpoint 3: Is this their bank account? (Bank Detail Verification)

This is the single most critical checkpoint for preventing direct financial loss. The central rule is that an invoice or an email must never be treated as the source of truth for bank account details. Fraudsters excel at manipulating these documents, making this the area of highest risk for preventing invoice scams.

The most common threat here is Business Email Compromise (BEC). According to the 2023 AFP Payments Fraud and Control Survey, BEC remains the most prevalent method for payments fraud. A scenario we repeatedly see is a fraudster gaining access to a legitimate vendor’s email account. They monitor correspondence, wait for an invoice to be sent, and then intercept it. They edit the bank details on the attached PDF to an account they control and forward it to you. Everything looks legitimate, but the money is sent to an untraceable account.

To prevent this, you must verify bank account details through an independent, out-of-band channel. This means calling a known contact at the vendor using a phone number you already have on file, not one from the suspicious email or invoice. A better, more scalable approach is to use a secure vendor portal where suppliers enter their own details, which are then subject to automated verification checks.

Checkpoint 4: Are there any red flags? (Risk & Sanctions Screening)

While the first three checkpoints are essential from day one, deeper background checks become relevant as your startup matures. This involves screening vendors against government watchlists to ensure you are not doing business with restricted or sanctioned entities. For most early-stage SaaS or E-commerce businesses, this is not an immediate priority. However, for companies in regulated industries like Biotech or those scaling internationally, it becomes a necessity.

Government sanctions lists, such as the OFAC Specially Designated Nationals (SDN) list in the US, must be checked for certain industries or as companies scale internationally. This process is a key part of advanced third-party risk management, protecting the company from severe legal and reputational damage. Sanctions screening typically becomes a requirement around Series B+ or when expanding into highly regulated markets. At this stage, manual checks are impractical, and companies adopt specialized software to automate the screening process.

Your Onboarding Playbook: A 'Crawl, Walk, Run' Framework

Implementing these controls does not require an expensive system from the start. Using your 'Crawl, Walk, Run' framework allows you to build a robust process that scales with your company's growth without creating unnecessary friction. Learning how to prevent vendor fraud in startups begins with a simple, documented plan.

Crawl (Pre-Seed to Seed)

At this stage, your process can be lean and manual. Create a simple Google Form for internal teams to request a new vendor, capturing the vendor's name, contact information, service description, and business justification. The finance or operations lead then uses a checklist to perform the core verification checkpoints: check Companies House or Secretary of State, request a W-9/W-8 or confirm VAT, and call the vendor to verify bank details. Documenting the completion of these steps in a shared spreadsheet creates a basic but effective audit trail.

Walk (Series A)

As the team grows, the manual process becomes a bottleneck. Now is the time to formalize and centralize your vendor approval process. Use a dedicated onboarding tool or a more advanced form that standardizes data collection directly from the vendor. This eliminates internal back-and-forth and reduces errors. While the verification steps may still be manual, the process is now documented, repeatable, and easier for new team members to follow, ensuring consistency across all new supplier relationships.

Run (Series B and Beyond)

With higher transaction volumes and hundreds of vendors, automation becomes key to managing risk and maintaining efficiency. Implement a procurement or accounts payable automation tool like Bill.com, Ramp, or Tipalti that has built-in vendor onboarding modules. These systems can automate tax ID validation, screen against sanctions lists, and provide a secure portal for vendors to manage their own information. This reduces manual effort, tightens controls, and provides a fully auditable history of every vendor relationship.

Practical Takeaways for Secure Vendor Onboarding

Building a secure vendor onboarding process is a foundational element of financial control that protects your startup's cash and reputation. It prevents you from paying a fake vendor, ensures an audit-ready trail, and frees up your team's time for more valuable work. To start today, focus on four practical actions:

1. Centralize All New Vendor Requests. Stop accepting new vendor details via email or Slack. Create a single, mandatory form for all new supplier requests to ensure you capture the necessary information consistently from the start.
2. Establish Separation of Duties. The person who requests a new vendor should not be the same person who approves them or processes their payments. Even in a small team, this simple separation creates a powerful internal control. Our guide on segregation of duties offers practical approaches.
3. Mandate Out-of-Band Bank Verification. Make it a strict company policy that all new or changed bank account details must be verified via a phone call to a known contact or through a trusted system. Never rely on an email or an invoice alone.
4. Document Your Process. Whether it’s a simple checklist in a spreadsheet or a workflow in an automation tool, write down your vendor onboarding steps. A documented process is repeatable, trainable, and demonstrates to investors and auditors that you are managing financial risk responsibly.

For more on designing effective financial systems, see the internal controls hub.

Frequently Asked Questions

Q: How often should we re-verify vendor details?
A: Re-verify vendor information whenever a critical detail changes, especially bank account numbers. For high-risk or high-volume suppliers, it is good practice to periodically re-validate their information, such as business status or tax details, on an annual basis to ensure your records remain accurate and compliant.

Q: What is the biggest vendor onboarding mistake startups make?
A: The most common and costly mistake is accepting bank account details from an email or an invoice attachment without independent verification. This opens the door to Business Email Compromise (BEC) and invoice scams, where a fraudster can easily divert your payment to their own account, leading to direct financial loss.

Q: Can't our accounting software (QuickBooks/Xero) handle this?
A: While accounting software like QuickBooks and Xero are excellent for tracking payments and managing bookkeeping, they are not designed to be comprehensive vendor management platforms. They lack built-in controls for identity verification, bank account validation, and sanctions screening, which are critical steps for preventing vendor fraud.