The economic climate has worsened over the last year with increased cash flow pressures on businesses who are navigating through a combination of higher interest rates, inflationary pressures, repayment of Coronavirus Business Interruption Loan Scheme (CBILS) loans and reduced demand for their goods and services. This financial pressure is further exacerbated as many businesses have had to run down their resources and their balance sheet strength to manage through the pandemic and do not have the financial strength left to support further poor trading conditions. This is illustrated by a 40% increase in the number of company insolvencies in May 2023 [1].
The psychology of fraud is an interesting topic and whilst some will always operate in a fraudulent manner these increased pressures may drive more companies to look at unscrupulous means to stay afloat and trade out of these circumstances. The prevalence of asset-based finance in the form of invoice discounting provides a potential opportunity for companies to improve their cash flow through fraudulent means.
The concept of fresh air invoicing arises where the invoice has been raised and submitted to the finance provider to enable the loan to be advanced, without any associated supply of goods or services to support the invoice and the future cash receipts from the client. At this stage the loan has been advanced against the invoice but there is no appropriate security in place to support the loan.
Fresh air invoicing may happen in a number of ways including:
- Issuing an invoice early before the goods have been despatched or before a milestone is reached on a service contract.
- Failing to raise credit notes as required
- Collusion within the supply chain to increase the gross value of the debtor book.
- Issuing fraudulent invoices to existing customers
- Issuing fraudulent invoices to fictitious customers
The impact on the funding provider is to breach the terms of the funding agreement and reduce the security held against the outstanding loan whilst allowing further funds to be advanced. In the event of insolvency of the business, this significantly increases the risk regarding the repayment of the loan balance.  Â
Hawkins have a boutique forensic accountancy practice who can assist with:Â Â
- Facility and collateral reviews
- Trading position and forecast reviews
- Ongoing Monitoring of trading position and facility usage
- Advice on options to reduce funding and exposure levels.
About the Author
Alex  heads up the Forensic Accounting service at Hawkins, is the Finance Director and a Fellow of the Chartered Institute of Management Accountants. Alex has experience undertaking investigations and reviews into business valuations, business failure and fraud. Alex qualified as a Chartered Management Accountant in 2001, practiced at KPMG and has undertaken corporate investigations for shareholders and providers of debt finance prior to joining Hawkins.
