Fraud attempts against lenders have been around for as long as there have been lenders. Disappearing with a loan, or pledging assets that aren’t quite what they seem, have been risks to banks since lines of credit were invented.
Frauds against invoice finance lenders can be equally unsophisticated, yet lenders continue to take losses. With hindsight, most of these are avoidable. But often, when it’s a choice between paying wages and suppliers or misusing an IF facility, a Director might choose the latter. Here are a few ways a Director mighty manipulate a facility to plug a hole in their cash flow.
No 1 – False Invoices
This is one of the simplest ways to obtain funding without any sale taking place. Most invoices, particularly lower value ones, are financed without review, so uploading a fictitious invoice can create additional funding with little risk of being spotted. It is only three or four months later when it is overdue, that it will begin to draw attention to itself. But by then the Director could have credited it out, or settled it with other funds, and covered his tracks.
No 2 – Diverted Receipts
At the outset of an IF facility the debtors are given the IF providers bank details – however, some take time to change. The temptation – or necessity – may arise to hang onto these payments instead of transferring them back to the funder. Cheques could be collected and banked to the business account – or new customers given the wrong bank details. Again, this is hard to spot initially, and this fraud can be hidden for months, particularly if the value is relatively small.
No 3 – Hidden Disputes and Credit Notes
With lenders only willing to finance undisputed and payable invoices, an under-pressure business will have little incentive to tell the lender about credit notes issued, disputes with debtors or returned stock. Doing so would lead to funding being reduced. Again, this fraud could go unnoticed by a lender for many weeks – perhaps until questions are asked about overdue invoices
No 4 – Re-Ageing Invoices
Generally, invoices are financed until they are paid, or until they are 90 days overdue. Funding is withdrawn at that point, with a knock-on effect on the business’s cash flow. To avoid that, the business might re-date invoices that are about to go overdue and alter the ageing profile of the sales ledger. Without vigilance and appropriate analysis, the lender can find themselves unwittingly financing invoices that are disputed, or that were fictitious in the first place.
No 5 – Collusion
This fraud is slightly different in character in that it involves people outside the business. And it is considerably harder to spot – initially at least. Colluding with a debtor and inducing them to validate fictitious invoices with fake purchase orders, signed delivery notes and verified payment dates, means that high value invoices that are spot checked by the lender are approved for funding. These frauds tend to be of higher value – and the lenders’ losses can be huge.
However, nothing is ever as simple as the fraudster would like it to be.
Even if they only use the most rudimentary manual analysis, the lender will eventually spot fictitious invoices not being paid, or debtor collections falling due to disputed invoices or cash banked elsewhere.
By that time, the money has gone, and a loss is inevitable.
Aaron Hughes, Managing Director, Equiniti Riskfactor