When a factored invoice goes unpaid

A factored invoice that goes unpaid does not just disappear from your ledger. It travels back to you, and it usually arrives at an inconvenient moment.

The recourse period

Your agreement defines a window — commonly counted in days from the invoice date or the due date; check which, because they can be 30 days apart. If the customer has not paid by the end of it, the factor exercises recourse.

What a chargeback does to your cash

Illustrative only — an $18,000 invoice was funded at an 85% advance, so you received $15,300. The recourse period expires unpaid. The factor recovers its advance and accrued fees. It applies the $4,000 of reserve it is holding, and the remaining $11,300 plus fees comes out of your next funding.

That is the mechanic worth internalising. A chargeback is not an invoice you can pay next month. It reduces the money arriving on Friday, which is frequently the money that covers payroll. A single large chargeback in a tight week is the most common way a factoring facility turns from a solution into a problem.

Then what

What cross-aging does, with numbers

Cross-aging is the clause that turns one late invoice into a funding cut, and it is easier to respect once you have seen the arithmetic.

One more $10,000 invoice ages past it. Now $52,000 of $180,000 is over 90 days — 28.9% — and the whole $180,000 becomes ineligible. At an 85% advance rate, $153,000 of availability disappears because $10,000 crossed a date.

That is why the aging report matters more than any individual dispute. The threshold is a cliff rather than a slope, and the invoice that triggers it is usually not the one you were worrying about.

If you have non-recourse

Read the definition of the covered event before you rely on it. Non-recourse cover is normally limited to the approved customer's insolvency, within an approved credit limit, and typically requires a formal insolvency event rather than a customer that has stopped paying. Everything else — disputes, deductions, offsets, returns, invoices above the credit limit, and customers who are merely slow — is charged back exactly as under recourse.

How to tell trouble is coming

You do not need the factor to tell you a chargeback is on its way.

• A customer stops responding to you, not just to the factor. Silence toward the party with the relationship is the signal that matters.
• A payment arrives short with no explanation. A short payment is a dispute that has not been stated yet.
• Days outstanding move on one customer while the rest of the ledger holds steady. That is a customer problem, not a market one.
• Verification calls start failing. An invoice the factor cannot get confirmed is already on its way out of the funded pool.
• Your own aging shows a bulge approaching the eligibility cut-off. Look at what will be ineligible in thirty days, not at what is ineligible today.

Each of those buys a week or two. In a facility where the chargeback comes out of Friday's funding, a week or two is the whole difference between managing it and discovering it.

What to do when an invoice goes late

1. Call your customer at day 5 past due, not day 45. The factor is chasing too, but you have the relationship.
2. Find out whether it is a dispute or a delay. A dispute is a chargeback waiting to happen and it needs fixing on the operations side, not the finance side.
3. Tell the factor what you find. Factors deal with slow payers constantly, and one that knows a resolution date has room to work with you. One that is surprised does not.
4. Ask about substitution or an extension of the recourse period before it expires. Both are sometimes granted and neither is available afterwards.
5. Model the chargeback against your next funding so you know what week it lands in.

The point of factoring is turning a receivable into cash sooner. It does not make a customer creditworthy, and in a recourse facility it never transferred the risk that the customer would not pay at all.

What to negotiate at the start

These terms decide how a chargeback feels, and they are set at closing rather than in the week of the problem.

• The length of the recourse period, and what it runs from. Invoice date and due date can be a month apart. On 60-day terms, a 90-day period from invoice date gives you thirty days of grace and from due date gives you ninety.
• A written right to substitute a clean invoice for a charged-back one, rather than having cash taken.
• A limit on how fast the factor can recover. Taking the full chargeback out of a single funding is the version that breaks payroll. Recovery spread across two or three fundings is a material protection, and it is sometimes agreed.
• The cross-aging threshold, and whether it is measured per customer or across the whole ledger.
• Notice before a chargeback. Some agreements allow it to happen silently. A stated notice period gives you the week you need.
• Who can raise the reserve, and by how much. Unlimited discretion after a loss is common, and worth a conversation before signing rather than after.

None of those six is exotic, and none is offered unprompted. Ask for them while the factor is still competing for your ledger, because after the first chargeback you are negotiating from inside the problem.