How Fraud Hurts Factoring, and 6 Tips to Reduce Exposure


By Bibby Financial Services

13 Feb 2017

As in any industry in which large sums of money frequently change hands, individuals and firms in the factoring industry must be very careful to avoid falling victim to fraud. With single transactions ranging from a few thousand dollars into the millions, due diligence and awareness of potential red flags are critically important to protecting every investment.

Factoring companies must be conscious of the potential for fraud with both new and existing customers. For example, BFS purchased another lender and acquired the receivables of one of their clients. During the transition, the client fraudulently validated a debtor statement when the debtor owed no additional money.

We were able to quickly determine what had transpired and resolved the issue. In another instance, a long-time client experienced a change in the owner’s personal status, an act of nature that impacted business and a shift in internal BFS staff managing the account. The combination of events led to the client’s submitting invoices for work that was never performed in order to gain additional funding. Internal portfolio monitoring helped to quickly identify abnormal trends and stopped the activity from escalating further.

The factoring industry has some systemic issues that make it possible for fraudsters to occasionally slip through the cracks, though this risk can be reduced with smart management.

These are some common issues that create opportunities for fraud:

In-depth due diligence can be expensive and time-consuming but is necessary in the line of defense against fraudsters. Starting the process by conducting in-depth searches on the company and its owners and reviewing exactly what the business does and with whom it does business, prior to any advance being made, provides an important check against fraud.

Not having qualified people to undertake this process and pressure to fund in a short space of time are both issues that can lead to a red flag being overlooked.  A complicated corporate structure can make it difficult to understand who owns the business and, therefore, exactly who you need to be undertaking due diligence on.

Seriously overdue payables, tax arrears, or some other need for immediate cash can cause an otherwise honest business owner to create increased availability to satisfy their liabilities often with the intention of making good at some point in the near future.

A large volume of invoices and account debtors can make it difficult to verify the total amount being advanced.

In some arrangements, the factoring firm is not responsible for ongoing debt collection and does not have direct communication with the debtors. This could delay the lender’s becoming aware of a potential issue.

Companies that build a record of timely debt collection and/or payment of asset-based loans are often rewarded with better rates and terms. This opens the possibility of creating a harmful arrangement in which a criminal could factor fraudulent invoices using the proceeds to pay off previously factored invoices, and continue on this cycle until they are caught. Each new settled debt creates the appearance of a credit-worthy company making it easier for the fraudster to close future factoring deals.

In addition to having a heightened awareness of fraud, factoring companies can reduce exposure by implementing and following these six practices:

  • Create and adhere to internal processes and procedures to help monitor against fraud.
  • Act immediately when you suspect or identify fraud. Quick Action is key to recovery
  • Introduce multi-level approval processes to have more than one pair of eyes looking at each facility on an ongoing basis. Ensure that individuals responsible for gathering new and existing client information and documentation are familiar with these common warning signs of suspicious transactions and know how to flag them:
    • Unusual amount of pressure/ urgency to close the deal or to fund a new debtor.
    • Unusually large invoices for existing client are also warning signs. Perform due diligence to ensure the information is accurate as presented
    • Inability or unwillingness to share basic identifying information of company principals. Conduct regular "Know Your Customer" searched throughout the relationship to monitor any changes and respond accordingly
    • Resistance to providing company financial performance information. Set the expectation regarding the client's responsibility to provide this data at the inception of the facility and hold the client accountable for providing the required information in a timely manner
  • Get to know your clients and consistently pay attention to their accounts, even long-standing ones. Be familiar with usual invoice amounts and debtors along with their invoicing and customer payment schedules. Immediately check on anything that isn’t routine, like multiple invoices for the same amount or a high volume of new invoices. Follow up on invoices that aren't paid within normal time frames.
  • Have processes to spot-check validity. Even in an arrangement where the client is responsible for debt collection, a factoring firm should have some direct communication with the client's debtors. The client may have innocent reasons for wanting to avoid this, especially when the debtors don't know the client has assigned its invoices, but it is always a smart step to confirm that invoices are genuine. Ongoing verification performed in the name of the client is an easy way to mitigate this risk if necessary.
  • Personally visit and/ or audit your clients. It may be unwieldy to verify volumes of invoices, but occasionally auditing a portion of them keeps all parties alert to potential fraud.  Additionally, an onsite visit helps to build a better relationship and understanding of how they operate.

Most frauds do not start as intentional. They tend to arise from a situation that required additional cash when there was no availability within the facility to meet these needs. The business owner probably had every intention of paying the factor back but other circumstances occurred before they could. A lack of procedures and not knowing your client make this easier to achieve. Fraud prevention is far less complicated than trying to recover from it once it has happened. Often by the time a factor that does not monitor client performance realizes they have a problem, it is too late.

What can the factoring industry do to address fraud on a broad scale? Establishing an industry-wide mechanism to share information about individuals and companies that have committed fraud should be a priority as it protects everyone. This is particularly important since fraud is all too often not prosecuted and can be too expensive to pursue through civil litigation.

Fraud hurts all parties. It is crucial to be aware of it and to be prepared to prevent it.  We are unlikely to be able to eradicate it altogether, but with the right procedures and careful monitoring, we can strive to prevent unnecessary losses.

About Bibby Financial Services 
Bibby Financial Services is a leading independent financial services partner to more than 10,250 businesses worldwide providing more than $1.25 billion in funding annually and handling $11.6 billion in annual client turnover globally.  With over 44 operations in 13 countries spanning Europe, North America and Asia, we provide asset based lending and factoring solutions to help businesses grow in domestic and international markets.

Established in 2001, Bibby Financial Services North America has seven offices in the U.S. and Canada that support businesses in virtually any industry. We hold memberships in the Commercial Finance Association, the International Factoring Association, and the American Finance Association.  Bibby Financial Services is part of Bibby Line Group (BLG), a diverse and forward-looking family business with over 200 years’ experience of providing personal, responsive and flexible customer solutions.

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