In part 1, we looked at some of the cockroach situations which emerged in 2025, risks associated with receivables finance, and some of the complexities for securitisation investors facing servicer insolvency. In part 2, we’re going to look at how lenders can fight fraud, and the fallout of the year of the cockroaches.

Roach killers

Because receivables fraud is a known risk, there are some established defences.

“The first line of defence is the people,” said Igor Zaks, CEO of Tenzor, an advisory and due diligence firm specialising in working capital financing and corporate distress. “If the people you’re facing raise red flags, you don’t even get to the part where you’re talking terms.”

Stenn founder Greg Karpovsky’s previous receivables finance firm collapsed amid fraud allegations (after he had left). Facts remain murky, but a lawsuit from HBK Investments, a Dallas hedge fund, called it “an enormous fraud” and said that “many of its clients were fictitious”. It is, at the least, an argument for enhanced due diligence on the way in.

A case in 2009, filed by Fortress Value Recovery Fund alleged that Patrick James, founder of First Brands, “created this web of companies to transfer funds from Columbus Components to management companies, such as Hawthorn Manufacturing and CCG Holdings, in an attempt to defraud Columbus Component’s creditors”.

The case was settled, but First Brands’ current creditors may be wishing they’d run a couple of name searches on the US’s PACER legal database.

The next lines of defence are more involved. The core mechanic in verifying receivables still involves contacting the payables departments, but there are third parties specialising in this work, and other tools involved that can flag suspicious situations.

History can help — if a firm usually sells 10k a month to a customer and puts in an invoice for 500k, it could be worth examining more closely. If a lender can access comprehensive bank records it can match receivables factored to actual cashflows, but this is harder than it sounds when all parties have multiple entities, multiple bank accounts, and potentially multiple receivables finance or factoring responsibilities.

Gold standard security for a receivables-based lender involves the lender or lending vehicles having direct control over collection accounts, but this is also harder than it might seem. Collecting on invoices is often deeply enmeshed in the ordinary COB cashflows around a corporate structure, and difficult to perfectly segregate.

A well-structured corporate receivables facility has to manage cashflows extremely carefully — lenders need security over the relevant corporate bank accounts, but deal structures can’t allow cash to be moved in and out of a securitisation vehicle at will, as though the securitisation-linked accounts were just another corporate bank account.

Rithm Capital has a thorough analysis of some of the tools available to control collateral — and what went wrong in First Brands and Tricolor. It cites three key safeguards in “well-controlled” structures — deposit account control agreements (a secured party can control the deposit account), customer payment notifications (the customer should be notified when a receivable is assigned to a facility) and invoice-level identification and duplication controls.

The paper notes: “Because First Brands acted as its own servicer — collecting customer payments, applying cash internally and remitting to various facilities — the integrity of the structure relied heavily on internal controls and reporting”.

Rithm outlines what it calls a “portable control stack” across different forms of asset-based financing, looking at enforcement mechanics, cashflow control, servicing oversight, continuous verification and bankruptcy-remote transfer mechanics. It applies differently to mortgages, auto loans, consumer loans and receivables finance, but the aim is segregate and verify assets, and ensure that enforcement and lender control is maintained.

“First Brands and Tricolor were not failures of exotic instruments. Both involved familiar asset types and credit structures,” says the paper. “The core lesson is that legal form — secured, self-liquidating, asset-based — does not guarantee outcome if lenders do not build and maintain operational control over the ownership, cash flows and verification of their collateral.”

In hot markets, protective provisions can easily be pushed aside. A lender can win a potentially lucrative deal by being easiest to deal with; the counterparty that keeps asking awkward questions and wanting to implement extra procedures can be ignored in favour of someone more “commercial”.

For a corporate borrower, receivables finance also has to compete against the terms on offer from other financing products.

Banks or private credit firms doing ordinary cashflow lending will not ask for access to bank accounts or direct verification of customer relationships; covenants will be light-touch, easily waived and financial transparency limited. Top tier sponsors ask their lenders to agree to annual lender calls only, and frequently receive assent; push too hard on disclosure and verification and the deal goes away entirely.

“There are so many features you can put in these structures,” said a lawyer. “but ultimately the bank that is most accomodating and gives most flexibility will be most attractive, and it can become a race to the bottom. Banks don’t want to offside of where market practice is.”