Reverse Factoring, Double Dipping, and Supplier Fraud

I am not aware of any buyer default on reverse factoring programs (sometimes mistakenly referred to as Supply Chain Finance).  That is not to say these receivables are risk free investments for investors.  In fact, given the state of perfection in different jurisdictions, buyer beware.

Suppliers fail, or worse, commit fraud by attempting to sell their invoices twice.  It’s all about survival.  Suppliers can finance the invoice with their local bank or factor as part of a lending scheme and can also finance the invoice with an  international bank who has a program with a large corporate buyer, say a John Deere or Caterpillar.

The funding provider who bought that receivable is awaiting payment from John Deere. This is where perfection of the receivable becomes a huge problem.

The question becomes who has the burden if perfection is not done with the receivable assets?  Or it’s done in a location which does not have tight registry rules like the UCC?  Banks try to push it back on the corporate buyer.   The banks argument is this is the buyer’s customer and they should take the risk.

If the supplier fails, both the local funder and the international funder will say I own these receivables from the supplier.  A court will determine who has priority, usually the local lender.  And a bank will go to the Buyer and say I own these receivables and you must pay.  If the contract is written with their bank that says when I buy those receivables from your supplier you are paying me no matter what, the Corporate buyer is on the hook for double dipping.  This means they better know their supplier base before entering into these programs.  They don’t want to be on the hook for a $2 million invoice that was financed by both JPM and a local Chinese bank if the Chinese supplier is pulling fraud.  If they have to double pay, it would be painful.

While you do not have public data about these failures, they happen.

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