Invoice Factoring Companies and Fraud: What You Need to Know

It seems like everywhere you look, invoice factoring companies are on the rise popping up all over the internet. A simple search for invoice factoring companies on a major search engine, for instance, will yield you some 373K results. Unfortunately whenever a business sector experiences dramatic growth, some people out there choose to take advantage of this it by committing fraud for their own financial gain.

Submitted Inflated or Phony Invoices to Factoring Companies

Factoring Fraud
By far the most common type of factoring receivables fraud is committed by the creation of phony invoices supported by equally phony supporting documents. Software and graphic programs enable invoices to be created with relative ease enabling a copycat business invoice to go undetected. Other times a company with an established relationship with the invoice factoring company may try to slip in a fake invoice in the hopes that the invoice factoring company will trust them therefore foregoing the usual verification and background proceedings. They might seek $8000 when the actual invoice is only $800 and blame it on a clerical error. Unfortunately, they sometimes succeed if the invoice factoring company skips portions of the verification process because they rely too heavily on the established relationship.

When a fraud has been committed by a regular client using factoring accounts receivables, the client will generally commit fraud again and again using new fake invoices to pay off old fake invoices. And so the fraudulent factoring services cycle will continue until the offending company gets caught or absconds.

Spot Factoring Requires Double, Triple Checking

Other times, the fraudulent activity may be associated with spot factoring also called single invoice factoring, where a company seeks to get financing per a one-time-only agreement. In this instance, the company seeking invoice factoring is less likely to establish a lasting relationship with the factoring company and more likely to take the money and run. The con in spot factoring may work with a company setting up an entirely fictitious business with phony records and credit histories and even a staged verifier who provides made-up information to the factoring company to “verify for accuracy.”

Relationships Can Not Replace Verification for Invoice Factoring Companies

Of course, due diligence, thorough verification, and corroboration are the keys for a factoring business to avoid becoming victims of such a scheme. Though persecution of such fraudsters does happen like the Arrow Trucking Fraud case, fraud can be a difficult, labor-intensive claim to prove depending on the size and multitude of the scam.

So any client that is reluctant to provide identifying information to the invoice factoring company could be suspicious. Because account receivables factoring is based upon expediency, a client could try to take advantage of this by rushing the company through the process in hopes they won’t pay too close attention to the documentation. Yet taking short cuts should never take the place of verification, and those companies who skip this crucial step are putting themselves at risk.

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About the Author:

Robert Bernfeld started in the commercial finance industry in 1974. His early years included positions with Aetna Business Credit and Foothill Group. During the next thirty five years. Mr. Bernfeld established both equipment leasing and accounts receivable factoring companies. He partnered in founding Business Facilitators, Inc. in 1999. Mr Bernfeld graduated from the University of California, Riverside in 1974 and received his Juris Doctorate from Loyola University School of Law in 1977.

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