How to Identify a Fraudulent Factoring Deal

Discover the 3 red flags a factoring broker or company should watch for that can be early warning signs of a fraudulent deal.

Some of the specific due diligence procedures factoring firms perform on new factoring candidates are cumbersome and/or costly. Because of this, it’s very rare that a factoring firm would ask a cash flow professional to conduct a thorough analysis as part of an early pre-qualification process.

Furthermore, a factoring company won’t even do an in-depth investigation on a prospect until after a representative has spoken with the prospect a number of times (via phone, email, video conference or in-person meetings), and it has also received all of the necessary completed paperwork to legally move forward with a factoring transaction.

With that said, there are a couple of red flags a factoring broker should watch for, as they can be early warning signs of a fraudulent deal.
PRN Healthcare Factoring

Red Flag #1 – A Business Owner Who is Extremely Urgent to Fund

Although, it’s commonplace for business owners to approach factoring brokers when they have run out of financing options, there are some specific times when a business owner’s dire need for fast cash can be cause for concern.

More often than not, factoring brokers should be weary when they come across a business owner that insists on being funded quickly while simultaneously existing in one of the following scenarios:

• Large Billing Volumes – If the prospect needs more than $200,000 in the first factoring transaction, and they make persistent promises of quick growth.

• Significant Debtor Concentration – If the business owner is doing all of his/her work with only one account debtor (client).

• Not Concerned with Fees and Advance Rates – Most all legitimate business owners in a cash flow crunch will be concerned with how much factoring with cost them and how much they will be advanced upfront on a transaction.

Red Flag #2 – Resistant to Providing Essential Identifying Information

It’s no secret that factoring companies are able to look past an entrepreneur’s less-than-perfect credit scores because for the most part, factors are more concerned with the creditworthiness of that business owner’s debtors. After all, it is the debtor who will be paying the invoices that the factor buys.

Even so, it’s still common for factoring firms to require their prospective clients to provide standard personal identifying information to help the factor complete the application process. Many factoring firms never meet their clients in person prior to sending thousands of dollars electronically. So it’s important for the factor to “know” the client as best they can on paper prior to an initial funding.

Some examples of commonly requested identifying information may include: social security numbers of company owner(s), current residential address and phone number, driver’s license numbers, etc. If one of your potential factoring candidates is unwilling to provide typical classifying information to you or the funder, then be cautious.

Red Flag #3 – Inability to Provide Current Business Documents and Financial Statements

Unwillingness to provide personal information is discomforting, but when a business owner is unable to produce typical business-related documentation, it’s even more unsettling.

When a business owner insists that he/she needs cash immediately, but they’re not able to provide the following, factoring brokers should proceed with caution:

  1. Articles of Incorporation or Articles of Organization
  2. Company’s physical location
  3. Previous years’ tax returns
  4. Balance Sheet or Profit & Loss Sheet
  5. Signed contract between the business owner and his/her customer

Alone, the above red flags are reason enough to raise an eyebrow, but if cash flow consultants come across a prospective factoring client who exhibits a combination of any of the above scenarios, then they should tread lightly. As always, be sure to give the funding source all pertinent details on a new lead prior to any formal introductions are made. It’s easier to work through potential red flags if the funding source is aware of them ahead of time.

Nikki Flores Factoring Investor AuthorNikki Flores is a Consultant Liaison for PRN Funding, LLC, which is an extraordinarily focused niche player in healthcare factoring.

PRN Funding exclusively factors the accounts receivable of companies that sell goods or provide services to healthcare providers.

Comments

  1. Great article Nikki.

    These red flags are true in factoring and other areas such as commercial mortgages, equipment leasing and cash advances.

  2. Thanks, Eric! Glad you enjoyed it.

  3. Derek Farmer says

    In the European market, there are differing distinctions :

    “Factoring”…….. The factoring company “manages” the sales-ledger of the client

    “Invoice-Discounting”….. the factoring company finances on a transaction-by-transaction basis

    A-Forfait …….. the factoring company buys avalised trade-bills.

    There is also the distinction between whether contracts are with or without recourse.

    It would be good if you could address these points

  4. Derek:

    PRN Funding is based in the United States. I’m sorry that I cannot elaborate on the European market.

  5. SHERRY W says

    It would be nice if someone talked about fraudulent factoring companies.

    They hold on to your checks for 5 days before depositing them. This allows them to charge the
    carrier more money. This factoring company blames their bank and the Post Office.

    Honestly, the post office delivers overnight in my city and worse case scenario 2 days.

    Yet every check I send them is 5-6 days old! This allows for the carrier to be charged extra because
    they use their “posting time” as when my check was “processed” If this is not illegal, it certainly is
    unethical.

    SW

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