Invoice Factoring Fraud in the United States

Published: 29th September 2009
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What is factoring fraud? All industries have fraud issues, but during the latest economic downturn, there has been an increase in factoring fraud cases. Factoring fraud is increasing significantly because factors work on high volumes and small margins. But before learning more, it is important to first understand what factoring means.

There are many terms for factoring including invoice discounting, invoice factoring, accounts receivable financing, and so forth. Factoring companies have been around since the first business in Mesopotamia 4,000 years ago. Along with writing, business codes and government regulations under the reign of Hammurabi, it was the Mesopotamians who introduced factoring to the world.

During the American Revolution colonies relied on factoring in England to sustain harvests of cotton, and timber and furs, and by the 1930's invoice factoring was standard business practice in the textile and garment industries.

Factoring as a business strategy is rarely mentioned in a company's business plan, it is truly one of the best kept secrets in business and can mean the difference between growth and failure.

Fraud as related to invoice factoring is quite challenging for the professionals in this specialized area. As an example, when a prospective client has a bad personal credit history, factoring companies must be on alert. Why? Here's what COULD happen.

A factoring company looked over one prospect's financials then the factoring company representative requested that they send the invoice and contract they wanted funded via construction factoring, also known as invoice discounting. Interestingly, when the contract was received the signatures of the general contractor looked the same as that of the subcontractor. After calling the general contractor it was discovered no one there had the name of the person who allegedly signed the contract. It was fraud.

Furthermore, factoring fraud is also the result of fictitious invoices being raised and sold to factors. The fraudsters use technology to perpetrate and control complex frauds, particularly in foreign countries. One of these scams involves the non-payment of large amounts of VAT, which is known as carousel fraud affecting innocent traders and funders.

Factoring companies have set up different methods of verification by the customer, and this is the primary step to avoid fraudulent transactions.

Here's another tip... Some of the bigger companies may also have employee directories on their websites or main lines, providing a good source for checking the title of the person signing the notification. This gives one an opportunity to make sure they are authorized to sign a document. You can also simply make a call to the reception desk at most companies and find out the same information. Ask for the extension and the position title listed rather than the person's name.

Due diligence activities are necessary when performing any job today where contracts are involved, including factoring.


Kristin Gabriel works with The Interface Financial Group (IFG), North America's largest alternative funding source for small business. The company provides short-term financial resources including accounts receivable factoring, serving clients in more than 30 industries in the United States, Canada, Australia and New Zealand. IFG offers expertise in factoring, accounting, finance, law, marketing and banking. For factoring services call

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