Factoring is now commonplace in the world of finance. The practice involves selling invoices to a financial institution, which then takes care of collecting unpaid customers. This technique is certainly practical, but it also leads to a great deal of fraud. What is factoring fraud? What are the consequences of factoring fraud? How can you protect yourself against factoring fraud? We take a closer look in this article!
What is factoring?
Factoring, also known as factoringis a process by which a company transfers its invoices to a companycalled a factor. The factor pays the company immediately and then handles collection from the customers concerned.
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Most factoring companies are banks, because the risk of advancing invoices would be too great for a traditional company. For example, you will find :
- La Banque Postale
- BPCE Factor
- BNP Paribas Factor
- Crédit Mutuel Factoring
- Delubac
- Eurofactor
- Factofrance
- Natixis
- Société Général Factoring
This method has a clear advantage when compared with the time taken to pay receivables, which can be up to 60 days after the invoice is issued.
The terms of the factoring contract determine the scope of the contract and the commissions charged by the factoring company:
- There financing commission a fee for the release of funds.
- There factoring commission a fee for debt collection.
👀 Good to know :
It is important to note that factoring company generally retains a guarantee. It recovers a percentage of the amount owed by the customer, and this percentage varies according to the factoring company.
Let's take an example to make it easier to understand!
Company A provides a service for company B. Company B is a little slow in paying Company A for the service provided. In order to be paid more quickly and to maintain good working capital, Company A decides to use a factoring company. Company A then provides its invoices to the factoring company, which then pays it for the service provided, retaining a small percentage.
Company B will subsequently compensate the factoring company directly.
What is factor fraud?
Factoring fraud has become easy these days, especially with the use of photo editing software. We explain why!
In a factoring fraud, a third-party company sends false invoices to a factoring company in order to collect undue money.
The fraudulent company alters or creates false invoices, often using photo editing software, in order to collect money it should not receive.
Let's go back to the previous example to make this explanation more concrete: let's imagine that the collaboration between company A, which has decided to use a factoring company, and company B comes to an end.
In a completely dishonest move, company A decides to continue sending invoices to the factoring company in order to receive money it should not have received. The invoices are obviously falsified, since the collaboration between Company A and Company B has ended. The factoring company therefore continues to send money to company A.
However, when the factoring company asks Company B to pay it the advanced invoice, Company B does not understand, as its collaboration with Company A has come to an end. The factoring company is therefore affected: it has reimbursed costs that should not have been reimbursed, so Company B does not have to pay it the invoice.
The biggest problem in this type of situation is that the fraudulent company, in this case company A, is often insolvent and therefore unable to repay the factoring company.
For a more concrete example of factoring fraud, see our dedicated article: The consequences of factoring fraud: the case of URICA
It should also be noted that the factoring company does not have the right to insure against fraud. It is therefore necessary for the factoring company to put in place measures to combat fraud. We'll tell you more in the rest of this article.
How can I protect myself against factor fraud?
Strengthening internal control processes
In the fight against factoring fraud, it is crucial not to never make a payment in an emergency. This is precisely what fraudsters count on. For example, it is advisable to carry out a double-checking by contacting the parties concerned by another means.
There segregation of duties also helps to reduce the risk of fraud. By involving several collaborators in the verification process, you drastically reduce the risk of fraud.
Use an anti-fraud solution
Fraud can often be detected by manual verification. For factoring companies, however, it is also essential to use an anti-fraud solution.
At Finovox, we have put in place a solution to detect false documents in two forms:
- There API solution allows you to receive information via JSON documents.
- By using our SaaS solutionYou can examine the documents and obtain explanations of the changes that have been made.
The aim of this two-part solution? To meet your needs as closely as possible. These solutions have been designed to be used in a complementary way. This guarantees rapid and efficient deployment and gives you access to all the Finovox tool's features if you wish!
Interested in the solution?
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