7 Common Ways Bad Actors Submit Fraudulent Invoices

Invoice factoring has become an essential tool for businesses seeking to maintain cash flow, manage working capital, and fund growth. By advancing funds based on outstanding invoices, factoring companies allow businesses to access money quickly without waiting for slow-paying customers.

However, with this convenience comes risk.

The factoring industry faces a constant challenge: fraudulent invoices. Industry studies suggest that invoice fraud accounts for up to 15% of errors in submitted invoices, costing factoring companies and businesses millions annually if undetected.

Fraudulent invoices can take many forms, from simple mistakes to highly sophisticated schemes. Bad actors are increasingly leveraging modern tools, insider knowledge, or clever manipulations to submit invoices for goods or services that were never provided, inflated amounts, or even entirely fictitious entities. To protect both themselves and their clients, factoring companies have had to evolve beyond traditional manual verification processes.

Today, they use a combination of customer authentication, meticulous documentation checks, and advanced technologies such as artificial intelligence and machine learning to detect anomalies and prevent losses. Understanding the common methods of invoice fraud is essential for businesses, accounting teams, and financial partners alike.

1. Duplicate Invoices

Duplicate invoices are one of the most straightforward forms of fraud:

• How it works: The same invoice is submitted multiple times to receive multiple payments.

• Why it matters: This can occur in high-volume operations and often goes unnoticed without automated checks.

Factoring companies utilize AI-driven duplicate detection to flag identical invoice numbers, dates, or amounts, reducing the risk of accidental overpayment.

2. Inflated Invoices

Inflating invoice amounts is a common tactic:

• How it works: The billed amount exceeds what was agreed upon for goods or services.

• Why it matters: Over-advancing funds on inflated invoices can create financial losses for factoring firms.

Verification through purchase orders, contracts, and historical transaction analysis helps detect abnormal increases.

3. Phantom Vendors or Customers

Some fraudulent schemes involve creating fictitious customers or vendors:

• How it works: Invoices are submitted for services never delivered or to non-existent entities.

• Why it matters: These invoices are entirely fraudulent and can cause significant losses if funded.

Factoring companies mitigate this risk with customer authentication, KYC checks, and database validation.

4. Misrepresented Goods or Services

Another tactic involves billing for services not rendered or delivered differently than claimed:

• How it works: The bad actor bills for higher quantities, premium products, or services never provided.

• Why it matters: Factoring firms may advance funds on invoices that are partially or entirely invalid.

Verification through delivery confirmations, service logs, and direct customer outreach helps catch this type of fraud.

5. Altered Invoices

Some fraudsters manipulate legitimate invoices after issuance:

• How it works: Changes may include invoice dates, amounts, or payment terms.

• Why it matters: Minor alterations can bypass traditional checks but still create funding risks.

Modern factoring platforms employ version control, secure submission portals, and AI anomaly detection to identify suspicious modifications.

6. Shell Companies and Collusive Activity

More sophisticated schemes often involve shell companies or insider collusion:

• How it works: Bad actors create entities that appear legitimate but exist solely to submit fraudulent invoices.

• Why it matters: Payments are redirected to controlled accounts, making detection challenging.

Mitigation involves due diligence, risk scoring, and cross-referencing against known industry databases.

7. Fake or Stolen Identity Invoices

Identity-based fraud can be especially dangerous:

• How it works: Bad actors impersonate real customers or vendors using stolen credentials or contact information.

• Why it matters: These invoices can appear legitimate, even to experienced teams.

Prevention relies on multi-factor verification, direct customer outreach, and AI-driven pattern recognition.

Conclusion

Fraudulent invoices are a persistent threat in the factoring industry, ranging from simple duplication to highly sophisticated schemes involving shell companies or stolen identities. Modern factoring companies have evolved significantly to combat these threats, combining traditional verification methods with state-of-the-art technologies like artificial intelligence, machine learning, and predictive analytics. These tools allow firms to detect anomalies, assign risk scores, and flag suspicious invoices before funds are advanced, reducing exposure to loss.

The integration of high-tech solutions with human expertise ensures a layered defense system. Manual checks, rigorous customer validation, and robust documentation practices complement AI’s ability to recognize patterns and detect irregularities at scale. As fraud schemes become more complex, these capabilities allow factoring companies to remain agile, safeguarding both themselves and their clients.

For businesses, understanding these risks—and working with factoring partners that leverage advanced fraud detection—provides confidence that funding is based on legitimate receivables. By staying informed and partnering with sophisticated, technology-driven factoring firms, companies can unlock working capital safely, maintaining cash flow without falling victim to fraudulent activity.