Debtor Verification: How a Financier Checks an Invoice

Under invoice finance, the client sends the financier a schedule of invoices and receives an advance against them, often the same day. Everything the financier knows about those invoices comes from the client. A client under pressure has two easy ways to borrow more than it should: raise an invoice before the goods leave or the work is done, or raise one for a sale that did not happen. Neither shows on a ledger, a borrowing base certificate or the management accounts until the cash fails to arrive.

The customer can see what the ledger cannot. It knows whether it placed the order, whether the goods arrived, and whether it disputes the price. Asking it is the most direct test an invoice financier has, and the one an invented invoice is least likely to survive, provided the question reaches the real customer.

Financiers usually verify by phone or email, sometimes by letter, and increasingly by reading the customer's own supplier portal, where large buyers record which invoices they have approved for payment. The questions are narrow: is the invoice on your system, for what, for how much, and when is it due to be paid? Some financiers also ask for a proof of delivery or a signed work order to sit beside the answer.

What gets verified is a matter of policy and of the agreement. Common triggers are invoices above a set size, the first invoices to a new customer, an invoice much larger than that customer's usual run, invoices raised in the last days of a month, and a random sample of the rest. A lender running an asset-based facility does the same work through the invoice tests in its field exam, and between exams on the invoices that carry the most weight.

Under confidential invoice discounting, the customer has not been told its debt has been assigned, so the call is commonly made in the client's name, by a team presenting itself as the client's credit control. Under factoring, where customers are notified and pay the financier directly, verification can be done openly. Until a customer is notified of an assignment, it can generally go on paying the client and keep the rights it has against the client, which is one reason confidential facilities lean harder on verification.

A maker of school uniforms, constructed for this page like every figure in it, sells to uniform shops and to schools directly. It has a confidential invoice discounting facility advancing 80% of eligible debtors, and its busiest weeks are in January, before the school year begins in New Zealand and Australia. In the last week of January it uploads invoices of US$1.9m, including one of US$420,000 to a regional retail chain whose largest order to date was US$150,000.

The size triggers a check. The phone number on the invoice reaches a mobile that answers with a first name. The financier's verification team finds the chain's accounts office through its published head-office number instead, and is told the chain ordered US$180,000 of stock, for delivery at the end of February, and has received nothing.

The invoice is not an invention: there is a real order behind part of it. It is a pre-billing of goods not yet made, inflated to more than twice the order. The financier disallows it, widens the sample to every January invoice above US$50,000, and finds two more raised before dispatch. It then asks the questions that matter more than the US$336,000: why the client needed the money, and who answers the phone number printed on the invoice.

DEFINED IN ONE PARAGRAPH → · INVOICE FINANCE → · THE FIELD EXAM →

Verification and notification are both conversations with the customer, and they are easily confused. Verification asks the customer a question and tells it nothing about the financing. Notification tells the customer that its debt has been assigned and that it must pay the financier. A financier can verify for years without notifying. It notifies when it needs the cash to come to it rather than to the client, usually because something has gone wrong, and at that point the customer's payments, and its view of the client, can change.

Verification also differs from a credit check on the customer. A credit check asks whether the customer can pay. Verification asks whether it owes the money at all. A financier needs both answers, and a strong customer is worth nothing as a debtor if the invoice against it describes goods it has not received.

Most verification passes quietly, and that is its value: it lets the financier fund quickly with some confidence. It decides a file when the answer and the invoice disagree. A short delivery or a price dispute usually means a credit note is coming and the invoice is reduced. A goods-not-yet-delivered answer means pre-billing, and a lender reads a pattern of it as the client funding itself ahead of its sales. An invoice the customer has no record of, or a contact who turns out to be the client's own staff, is treated as possible fraud, and a financier commonly stops further advances while it investigates.

A client's attitude to the process is read as well. Resistance to calls, requests that a particular customer not be contacted, or contact details that change between invoices are warnings in themselves, whatever the invoices say.

SELECTIVE INVOICE FINANCE → · UNAPPLIED CASH →