| Invoice factoring accounts for hundreds of billions of | | | | and the funds are collected. |
| dollars in transactions each year. Although many | | | | Since the funds will never be "collected", wouldn't the |
| business owners aren't aware that they can receive | | | | factoring company ask for the client to refund the |
| instant working capital by monetizing their accounts | | | | money or replace it with another invoice? Ordinarily |
| receivable through factoring, it is commonly used as | | | | that would be the case, but the fraud is typically |
| an alternative to traditional bank loans. The recession | | | | perpetuated by the customer submitting another |
| has caused the financial condition of many companies | | | | fake invoice for advance and using those funds to |
| to suffer and factoring has helped these firms to | | | | pay the first one. That fraudulent invoice is paid for |
| accelerate their cash flow in order to survive. | | | | with the proceeds of phony invoice number 3. In |
| Unfortunately, there are unscrupulous and desperate | | | | essence, the client is floating an interest free loan |
| individuals who try to manipulate and defraud | | | | until perpetuity or until they are caught. |
| factoring companies to enhance their firm's cash | | | | Most factoring companies that stay in business for |
| position. | | | | any length of time will put a system in place that will |
| The overall process of factoring is fairly simple. The | | | | detect such fraudulent occurrences before it can spin |
| client issues an invoice to a customer for goods sold | | | | out of control. Verification is the cornerstone of this |
| or services rendered. The customer has accepted | | | | system. This includes not just the verification of |
| the goods or services and promises to pay on | | | | invoice amounts and legitimacy, but also making sure |
| account within the client's credit terms. Instead of | | | | the initial information given about each of the debtors |
| waiting for 30 to 60 days to get paid by the | | | | is valid. Because the factor has such tremendous |
| customer, the client submits the invoice to the | | | | exposure, they must control payments by requiring |
| factoring company and receives an advance based | | | | debtors make all payments to a lockbox. They must |
| on a percentage of the invoice. This percentage is | | | | verify information provided about debtors by |
| anywhere from 70% to 90%, depending on several | | | | independent sources, not just by the client. |
| factors such as type of industry, creditworthiness of | | | | The relationship between the factoring company and |
| the customers and length of time in business. The | | | | the client should be cordial, yet entirely professional. |
| advance is immediately wired to the client's account. | | | | An example of how a business relationship became |
| The customer mails a payment payable to the | | | | too personal was when a client began dating a staff |
| company to a lockbox controlled by the factoring | | | | member of the factoring company. He learned from |
| company. The factoring company then remits the | | | | his new girlfriend that the factoring company only |
| reserve (the invoice total less the amount that was | | | | verified invoices greater than $800. With that |
| advanced) minus the factoring fee. The transaction is | | | | information, he suddenly flooded the factoring |
| now closed. If all the factoring situations went like | | | | company with several phony invoices between $600 |
| this, there would be no problem. But when fraud and | | | | to $700 each. By the time the owners of the factor |
| manipulation come into play, it changes everything. | | | | caught on, their exposure was over $100 thousand |
| The most common way dishonest people defraud a | | | | dollars. They probably could have sued the client, but |
| factoring company is by submitting a false or inflated | | | | knew that to do so would put the client out of |
| invoice for advances. Usually, this is done after the | | | | business, which would cause economic peril for |
| relationship has been in place for a while and the | | | | themselves. They had no choice but to ride it out |
| factoring company has developed a comfort level, | | | | and hope things would turn out okay. |
| especially with particular debtors. These phony | | | | Most people are honest, but it only takes one or two |
| invoices can be done very easily with a modern | | | | bad apples to place a factoring company in a |
| software and a cheap printer. They can be done with | | | | precarious situation. That's why verification on an |
| existing debtors that the factoring company | | | | ongoing basis is critical for a factoring company to |
| recognizes or fictitious customers. Usually, the phony | | | | function. |
| invoice is submitted along with several legitimate ones | | | | |