Chargeback (in Factoring)
In factoring, a chargeback is when a factor charges an unpaid or disputed invoice back to the client, reversing the advance it made. Chargebacks arise in recourse factoring, where the client, not the factor, bears the credit risk if the account debtor does not pay.
What a Chargeback Is
When a factor advances against an invoice and the account debtor ultimately does not pay, or short-pays because of a dispute, the factor recovers the money it advanced by charging the invoice back to the client. The chargeback reverses the advance, usually by deducting it from the client's reserve or from funds due on new invoices.
Chargebacks and Recourse
Chargebacks are a feature of recourse factoring. As covered under recourse versus non-recourse factoring, in a recourse facility the client keeps the credit risk, so an unpaid invoice comes back to the client. In a true non-recourse facility, the factor absorbs the loss on a debtor's insolvency and cannot charge that invoice back, though non-recourse usually still allows chargebacks for disputes and other non-credit reasons.
Common Triggers
- Non-payment past a set period, often 90 days, in a recourse facility.
- Disputes, returns, or short-pays, which are a form of dilution rather than credit loss.
- Ineligible or invalid invoices discovered after funding, such as duplicates or unverified work.
Why It Matters
Chargebacks are how a factor manages risk after funding, but a book full of chargebacks signals weak verification or deteriorating debtors. Catching problems before funding, through verification, and tracking dilution and aging closely reduces them. Zolvo automates invoice verification, reconciliation, and dilution monitoring so factors prevent avoidable chargebacks rather than processing them after the fact.
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