How InvoiceMate Detects and Prevents Invoice Financing Frauds

In the following lines, we will look at invoice financing frauds and how InvoiceMate detects and prevents these invoice financing frauds.  

Invoice Financing has always been a tricky subject. The reason is vulnerabilities associated with invoice financing. Financing is the lifeline of any business. There are hundreds of institutions that provide financing facilities to businesses. When it comes to invoice financing, most of those will be reluctant to cater to it.  

Why? 

To find the answer, we need to understand the basics of the financing mechanism.  

Like any other business, commercial financing never happens in thin air. When an institution extends financing to a business or an individual, it needs to protect its investment (loan) against some collateral. The most trustable form of collateral for a financing company is a fixed capital asset. This can be land, building, plant and machinery, physical inventory, stock shares, etc. Another form of collateral can be a value-backed document like a letter of credit, bank guarantees, bonds, or guarantee cheques. All these collaterals are usually acceptable by financing institutions as they provide some tangible assurance against the credit extended.  

In Invoice financing or factoring, the scenario is a little bit different. Here, the receivable invoice itself acts as collateral. The borrowing business submits its receivable invoices to the lending business to secure the loan against those. Once the invoice becomes due, the business collects the amount and pays it back to the lender against its outstanding amount along with the agreed-upon service charges. In the case of invoice factoring, the lender keeps the invoices and directly collects the payment, once due. Theoretically, everything looks great but unfortunately, that’s not the case in real life.  

Why is it so? 

The reason is very simple. The problem here is the collateral (invoice). Unlike other paper collateral like bank cheques, L/ C, share certificates, and bank guarantees that are issued by a trusted 3rd party, the invoice is a document between two businesses or individuals. That is why it is not easily possible to verify the authenticity and integrity of the invoice through an independent mechanism. Due to these limitations, invoice financing is prone to multiple kinds of fraud. These frauds are not easily detectable and are the major reason why invoice financing is not a commonly available financing medium. The due diligence or compliance for invoices is tedious, costly and lengthy, and not viable keeping in view the short-term nature of this type of financing. That is why most financing institutions avoid invoice financing/factoring.  

Invoice Financing/Factoring Frauds 

Let’s take a look at some of the major frauds and issues related to invoice financing;  

False or Fake Invoices  

These invoices are also known as fresh air invoices. These are the invoices that are generated against the transactions that never actually happened. It is a very common type of invoice financing fraud. Usually, these types of invoices are of small denominations so they can bypass strict compliance.  

Collusion 

It is a fraud that usually happens with the cooperation of people outside the borrower’s business. In this type of fraud, the borrower takes help from external actors to misrepresent or fake the transaction or validation and deceives the lender. Usually, the value and the stakes are high in this type of fraud. 

Duplicate Financing 

It is also a very common way of invoice financing fraud. In this method, the borrower uses the same collateral with more than one financing institution to get credit. This type of fraud can happen within the same country or even multiple countries.  

Hidden Disputes 

In this type of fraud, the borrower doesn’t disclose the dispute attached to the transaction. These disputes or undisclosed information can be sales returns, credit notes, or discount notes.  

Re-Ageing  

Invoice financing is done for the payment period of an invoice or some grace overdue period. In re-aging fraud, the due date of the invoice is tampered with to extend the financing period or to get extended finance against the invoices that are about to expire or already expired.  

Error and Omission 

Any error or omission leading to the inflated invoice value. Though it isn’t a deliberate effort, it can still result in a loss for the lender. Error and omission can also happen on the lender’s part.  

Impersonation and Diversion of Funds 

This is fraud done by a 3rd party. In these types of frauds, a mal-intended actor impersonates some business entity and gets finance against fictitious collaterals. There is another type of fraud where a fraudster gets disbursement of valid financing of the company redirected to their account.  

All the above frauds are major hurdles in invoice financing. That is why invoice financing constitutes only 0.051 of the total global invoice financing market of around $7833 billion.  

How to Prevent Invoice Financing Fraud 

The only possible way to prevent invoice financing fraud is strict compliance. Thorough due diligence can verify the following. 

• The Seller (Borrower too) 
• The buyer 

• The transaction (invoice) 

The integrity of the invoice can be ensured only with the verification of the content of the invoice.  

The Problem 

The nature of invoice financing is short-term, so the financing institutions find it inviable to spend the time, effort, and resources required to perform the required compliance.  

The Solution  

An industry-standard compliance service for the due diligence of invoices.  

The answer is InvoiceMate 

InvoiceMate is the world’s first blockchain-powered invoice management system. Every stage of invoice processing, from invoice creation to disbursement is recorded on an immutable, distributed, and decentralized ledger of the blockchain. This way every invoice created through InvoiceMate is always verifiable for its integrity. An invoice recorded on blockchain can neither be deleted nor edited as each new iteration is recorded as a separate entry leaving the original version always available. InvoiceMate offers a unique value proposition for banks and other financing institutions in the shape of KYI.  

KYI  

KYI or “Know Your Invoice” is a service for the invoice financing industry. KYI can be equated to KYC (Know Your Client/Customer), a common compliance service in the financial industry. With KYI a financing institution can verify the integrity of the invoices presented for financing as well as that of the parties involved in the transaction. This almost real-time service comes at a fraction of the cost that is required for an in-house or 3rd party due diligence process required otherwise.   

Blockchain-powered InvoiceMate is inherently capable of preventing frauds like  

• False or Fake Invoice 
• Collusion 
• Duplicate Financing 

• Hidden Dispute 
• Re-Ageing 
• Errors and Omission 
• Impersonation 
• Redirection of Funds 

By acquiring the KYI service, the financing institution can verify the invoice journey even before the creation of the invoice (With quotations, POs, and other supporting documents). The integrity of the invoice as well as the payment channels are also verifiable by the financing institutions concerned. This way the financing institutes can extend financing facilities against invoices while remaining secure.  

More about KYI can be found here.  

To learn more about InvoiceMate, visit invoicemate.net