Mitigating Fraud Risk in Factoring and ABL: Proactive Measures and Best Practices

Jun 24

While we may like to imagine a land of lending without fraud, the reality is it simply doesn’t exist. Fraud isn’t the invisible monster under our beds we used to fear as children, but a very true reality that seems to grow more rampant every day. From fabricated invoices and phantom debtors to collusion and bogus borrowing bases, fraud schemes continue to evolve in complexity and creativity - especially with the use of AI. To protect your portfolio and ensure legacy success, it is critical to implement proactive fraud prevention strategies.

Understanding Fraud in Factoring and ABL

With heavy reliance on borrower provided documentation and debtor terms beyond control, Factoring and ABL companies are particularly vulnerable to fraud. Some common fraud schemes we see are:

Fictitious or duplicated invoices
Fabricated debtors
Collusion between clients and their debtors
Misrepresentation of financials or receivables
Phantom clients - disappearing after receiving the first funding

These sorts of fraud tricks can go unnoticed until a payment date is missed or a follow up diligence check uncovers inconsistencies, at which point the lender already faces a loss. Leveraging strong technology with risk monitoring protocols, trend alerts, and integrative underwriting can help keep the lender in the drivers seat and fraudsters out of the picture.

Proactive Measures to Mitigate Fraud Risk

1. Strengthen Onboarding and KYC Processes

Verification of client identities using multiple data points like background or credit checks, drivers license verification and information verification can help ensure your business officer or owner really is who they claim to be, with a genuine functional business needing help. Automating checks like this where possible can help reduce human error or catch things that may have slipped through the cracks.

2. Leverage Real-Time ID and Document Verification

Using tools like driver’s license verification and OCR document checks to ensure the authenticity of key documents and elevate critical data can save time and prevent loss. Finding a platform with AI-enabled tools that can detect tampering or inconsistencies will help keep you ahead of the game.

3. Implement Debtor Verification Protocols

Verifying the legitimacy of debtors before funding is another can’t miss step. From trade references and credit checks, to direct verification calls on outstanding A/R and getting a signed NOA, locking down a strong relationship with the debtor is key to ensure timely payment.

4. Monitor for Suspicious Patterns

Leverage your technology stack to flag unusual behaviors such as:

Sudden spikes or drops in invoice purchases or volume
High concentrations of receivables from a single debtor
Repetitive PO or other identifying numbers on invoices or backup documentation
Irregular payment patterns including increase in past due invoices, skipped invoices, or NSF payments

5. Tighten Internal Controls

Restrict platform permissions based on internal roles. Restrictions like using dual approvals for major funding decisions, changes to debtor limits, or exceptions to standard underwriting policy can ensure no opportunity for internal missteps. Finding a system that allows for a full audit on all system activity can track potential misuse.

6. Train Teams to Spot Red Flags

Educate your underwriting, operations, and collections staff on common fraud indicators. Using real examples from past losses or current struggles of fellow lenders can foster a culture where team members are encouraged to escalate concerns without fear of blame.

Best Practices for Ongoing Fraud Prevention

Automate wherever possible to reduce manual error or opportunity for human manipulation.
Centralize processes through a single platform to prevent off the record dealmaking or invoice changes.
Conduct periodic audits on funded invoices, underwriting activity, and client performance.
Use layered fraud protection combining client and portfolio analysis, historical data, and AI tools for a more accurate risk profile of your book of business.

Fraud risk can’t be eliminated—but it can be managed.

With the right mix of technology, operational discipline, and team awareness, Factoring and ABL firms can stay ahead of fraudsters and protect their business.

Looking to upgrade your fraud defenses? Platforms like XEN offer built in fraud analysis tools, permission based workflows, and due diligence features designed to keep you one step ahead.

Jessie Szemraj