An organization’s security is only as strong as its partners’. For small and mid-sized businesses (SMBs), third-party vendors play a vital role in everything from payroll and HR to IT and finance, but each new connection can also introduce new vulnerabilities. Cybercriminals increasingly target vendors as entry points, exploiting weak links to access sensitive data or financial systems.

In this fourth and final installment of our Small Business Guide to Fraud Prevention series, Steve Lenderman, isolved’s Head of Fraud Prevention, shares insights into what SMBs should look for in vendors to ensure they’re truly cybersafe. From evaluating security practices and certifications to managing access controls and ongoing oversight, this discussion explores how to build trusted partnerships that strengthen your organization’s defenses.

Vendor Vetting & Selection

Q.        What are the key cybersecurity factors SMBs should consider when evaluating a potential vendor or service provider?

Choosing the right vendor starts with understanding the key cybersecurity factors that ensure a secure partnership. Here are a few considerations SMBs should review in potential vendors or service providers:

• External Cybersecurity Ratings: Use third-party tools to assess a vendor’s patching cadence, malware exposure, domain name system (DNS)/Internet protocol (IP) hygiene and open ports. Many SMBs require a minimum rating before onboarding.
• Breach History and Transparency: Ask the right questions, like: Have you experienced a breach in the past 24 months? What systems were affected? How were customers notified and protected? Verify their answers with breach intelligence platforms.
• Access Scope and Integration Risk: Determine how deeply the vendor integrates with your systems, including access to production environments or sensitive data, Application Programming Interface (API) usage and credential storage.

TIP: High access should trigger stronger scrutiny and segmentation.

• Regulatory Compliance: Confirm that security and compliance frameworks align with respective industry standards, such as Health Insurance Portability and Accountability Act (HIPAA) (healthcare), Security Operations Center (SOC) 2 Type II or International Organization for Standardization (ISO) 27001 certifications. Request documentation to verify compliance.
• Security Technologies and Tools: Evaluate the vendor’s use of artificial intelligence (AI), machine learning and threat intelligence platforms. Test their tools for compatibility with your systems and scalability as your business grows.
• Customer Support and Incident Response: Look for 24/7 support and rapid response capabilities. Ask about patching schedules and how they handle zero-day vulnerabilities.

Q.        How can a business determine whether a vendor takes data security seriously before signing a contract?

Confidence in a potential vendor’s data security practices requires meticulous vetting. Here are a few tips on how to conduct such vetting:

• Request a security questionnaire or due diligence package. Ask the vendor to complete a vendor security assessment or provide documentation on data encryption.
• Request recent audit summaries or attestations to verify certifications and audit reports.
• Inquire about data breach history in the last 2–3 years. Ask how they handled disclosure, remediation and customer communication.
• Evaluate contractual security clauses, confirming the contract includes data protection obligations, breach notification timelines, right to audit or request security documentation and liability and indemnification terms for security failures.
• Assess technical safeguards by inquiring about the use of encryption standards, such as AES-256 and TLS 1.2+^[1], data segregation in multi-tenant environments and secure software development practices
• Check external security ratings with risk indicator tools like SecurityScorecard, BitSight or UpGuard, which provide insights on the vendor’s cyber hygiene and risk profile.

Q.        Are there any “red flags” that suggest a vendor might not have adequate cybersecurity controls in place?

While not all organizations or scenarios may have obvious red flags, here are a few to keep an eye out for:

• No Documented Security Policy: The vendor cannot provide a written security policy or struggles to explain their approach to data protection. They lack clarity on encryption standards, access controls or incident response procedures.
• Outdated or Unpatched Systems: They rely on legacy software or operating systems with known vulnerabilities. They’re slow to apply security patches or lack a formal vulnerability management process.
• Weak Access Controls: No enforcement of MFA. Excessive permissions granted to employees or contractors. No RBAC in place.
• Limited Visibility into Sub vendors: The vendor outsources critical tasks to third parties without disclosing them.
• History of Security Incidents: The vendor has experienced breaches or data leaks but offers vague or evasive answers about what happened and what was improved.
• Unusually Low Pricing or Aggressive Timelines: Offers that seem “too good to be true” may reflect underinvestment in security or rushed development.

Q.        What role do certifications or frameworks (like SOC 2, ISO 27001 or National Institute of Standards and Technology (NIST)) play in vendor evaluation — and which ones matter most for SMBs?

A certification like ISO 27001, an attestation report such as SOC 2 and frameworks like NIST play a critical role in vendor evaluation by signaling a vendor’s commitment to cybersecurity best practices, regulatory compliance and operational maturity. For SMBs, SOC 2 and NIST Cybersecurity Framework (CSF) are often the most practical and impactful.

Data Handling, Access & Incident Response

Q.        What specific questions should SMBs ask about how vendors store, encrypt and transmit data?

SMBs should ask vendors about encryption standards, data segregation, transmission protocols, access controls and breach response procedures to ensure robust data protection. These questions help uncover whether the vendor’s practices align with industry standards and your risk tolerance.

Here are some questions you can ask, as well as some tips on what to look for in their response.

• Data Encryption
  • Do you encrypt data at rest and in transit?
    • Look for AES-256 encryption for stored data and TLS 1.2+ for data in transit.
  • Where are encryption keys stored, and who manages them?
    • Ensure keys are stored securely and not accessible to unauthorized personnel.
• Data Storage Practices
  • Where is customer data physically stored?
    • Ask about geographic location, data residency laws and whether storage is cloud-based or on-premises.
  • Is data segregated between clients in multi-tenant environments?
    • Confirm that your data won’t be exposed to other customers through shared infrastructure.
• Data Transmission
  • What protocols do you use to transmit sensitive data?
    • Expect secure protocols like Hypertext Transfer Protocol (HTTPS), Secure File Transfer Protocol (SFTP) or Virtual Private Network (VPN) tunneling.
  • Do you use end-to-end encryption for communications involving sensitive information?
    • This ensures data remains protected throughout its journey.
• Access Controls
  • Who has access to our data, and how is that access managed?
    • Ask about RBAC, MFA enforcement and audit trails.
  • Can we restrict or monitor vendor access to our systems?
    • Look for transparency and control over third-party integrations.
• Incident Response and Breach History
  • Have you experienced a data breach in the past 24 months?
    • Ask how it was handled and what improvements were made.
  • What is your breach notification timeline and process?
    • Ensure they commit to prompt, clear communication in case of compromise.
• Compliance and Certifications
  • Are you compliant with SOC 2, ISO 27001, HIPAA or other relevant standards?
    • Request documentation or audit summaries to verify.

Q.        How much system or data access should vendors realistically have, and how can businesses limit that safely?

Vendors should only have the minimum access necessary to perform their contracted services, nothing more. This principle, known as least privilege, helps SMBs reduce exposure and maintain control.

Q.        What should be in a vendor contract regarding cybersecurity responsibilities and incident response?

Vendor contracts should include clear cybersecurity responsibilities, breach notification timelines, audit rights, data protection standards and incident response protocols. These clauses protect your business and ensure accountability.

• Cybersecurity Responsibilities
  • Minimum Security Standards: Require vendors to follow recognized frameworks, such as SOC 2, ISO 27001 and NIST CSF.
• Data Protection Measures
  • Encryption at rest and in transit, including AES-256 and TLS 1.2+
  • RBAC
  • MFA
• Employee Training: Vendors must train staff on cybersecurity and fraud awareness regularly.
  • Incident Response Obligations
• Breach Notification Timeline: Vendors must notify you within a defined window after discovering a breach.
  • Cooperation Clause: Vendors must assist with investigations, provide logs and preserve evidence.
  • Remediation Requirements: Vendors must take corrective actions and share post-incident reports.
• Audit and Assessment Rights
  • Right to Audit: You may conduct periodic security audits or request third-party assessments.
  • Penetration Testing: Vendors must allow or conduct regular vulnerability scans and share results.
• Compliance and Liability
  • Regulatory Compliance: Vendors must comply with applicable laws like GDPR, HIPAA and PCI DSS.
  • Indemnification: Vendors are liable for damages resulting from their failure to meet security obligations.
  • Termination Rights: You can terminate the contract if the vendor fails to meet cybersecurity standards or experiences repeated breaches.
• Data Ownership and Retention
  • Data Ownership: Your business retains full ownership of all data shared with the vendor.
  • Data Retention and Disposal: Vendors must securely delete or return data upon contract termination.

Q.        How can SMBs ensure vendors follow proper security protocols when offboarding or terminating a contract?

To confirm vendors follow proper security protocols during offboarding or contract termination, SMBs must treat the process as a controlled disengagement with clear expectations, documented steps and verification.

Approach the process with the same structure and attention as onboarding. Revoke all system and data access promptly by disabling credentials, integrations and shared platforms. Require vendors to return or securely delete company data and confirm completion in writing. Conduct a final security review to verify that no access remains and all obligations have been met. A clear, consistent offboarding process protects systems, safeguards information and reinforces strong vendor management practices.

Strengthening Your Defense: How isolved Helps Customers Stay Secure

isolved delivers powerful security features behind the scenes, but customers play a vital role in protecting their data. Here are some practical ways to take greater control of their own security and strengthen their organization’s defenses:

• Authentication and Access Controls: isolved enforces strong authentication practices, requiring individual login credentials and multi-factor authentication (MFA) through a passkey or authenticator app. Shared credentials and SMS/email-based authentication are no longer supported, and MFA is mandatory for sensitive actions like direct deposit updates in Adaptive Employee Experience (AEE). To take it further, your business can adopt company-wide MFA policies, regularly review access permissions, and educate employees on password hygiene and phishing awareness.
• Monitoring and Reporting Suspicious Activity: isolved provides real-time tools to help you identify and address potential threats early, including login alerts for uncommon devices and the Fraud Reporting Tool in PartnerHub for flagging suspicious activity. Stay one step ahead by encouraging employees to report unusual behavior promptly and by reviewing activity logs regularly to spot patterns before they escalate.
• Incident Response and Collaboration: isolved’s Customer Security Incident Response Team (CSIRT) is available to assist with potential security incidents. If you suspect a violation, report it immediately and work closely with isolved’s Incident Response Team to resolve the issue. Internally, consider designating a security point of contact within your organization to streamline communication and ensure quick action.
• Ongoing Security Investments: isolved continues to strengthen both technical protections, such as advanced encryption and system safeguards, and administrative measures like staff training and security policies. You can complement these efforts by scheduling periodic internal security reviews and keeping your workforce informed about evolving fraud and cybersecurity threats.
• Compromised Credential Protection: isolved supports breached password detection, prompting users to reset compromised credentials. To stay proactive, encourage employees to use password managers, rotate credentials regularly and avoid reusing passwords across multiple accounts.

Together, these actions not only complement isolved’s built-in protections but also help create a stronger, more proactive security culture across your business.

Cybersecurity isn’t just an internal responsibility, it extends to every partner, vendor and platform your business relies on. For SMBs, the key to minimizing risk lies in building relationships grounded in transparency, accountability and continuous vigilance. By asking the right questions, verifying security practices and maintaining active oversight, organizations can turn their vendor network into a true extension of their defense strategy. Trust is earned through verification and when businesses and partners share the same commitment to cybersecurity, everyone becomes stronger together.

To stay in the know about the latest fraud, cyber and security trends, register for the upcoming webinar on December 9—”Inside the Next Wave of Cybercrime: 2026’s Biggest Scams and How to Outsmart Them.”

_{Disclaimer. The information provided herein is for general informational purposes only and is not intended to be legal, investment or tax advice. It is not a substitute for professional legal, investment or tax advice, and you should not rely on it as such. No attorney-client or accountant-client relationship or any other kind of relationship is formed by any use of this information. The effective date of various provisions, amendments, and regulatory guidance may impact eligibility. The accuracy, completeness, correctness or adequacy of the information is not guaranteed, and isolved assumes no responsibility or liability for any errors or omissions in the content. You should consult with an attorney, investment professional or tax professional for advice regarding your specific situation.}

^[1] _{Advanced encryption standard (AES) and transport layer security (TLS) are standard encryption methods that protect sensitive data both in storage and during transmission. AES secures stored information through strong data encoding, while TLS protects data as it travels across networks, preventing interception or tampering. Together, they help ensure privacy and trust across digital systems and communications.}

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