In factoring, a chargeback is when a factor transfers the cost of a purchased invoice back to the seller because it was not paid in full. The word is also used in retail for deductions customers take from payments, which is a related but different idea.
How it works in factoring
Chargebacks usually happen in three situations:
- Recourse period expires: under a recourse agreement, an invoice still unpaid after the agreed period is charged back.
- Short payment or dispute: the customer pays less than the invoice because of a return, damage, pricing error or disagreement.
- Breach of warranty: the invoice turns out to be invalid, duplicated or for work not completed.
The factor typically recovers the chargeback by deducting it from the seller's reserve, netting it against the next funding, or asking for a direct payment. The charged-back invoice is then returned to the seller to collect.
Illustrative example: A $7,500 invoice was advanced at an assumed 80% ($6,000). It remains unpaid past the recourse period. The factor deducts the $6,000 advance plus accrued fees from the seller's reserve and reassigns the invoice to the seller.
Retailer deductions, sometimes also called chargebacks, add to dilution and often lead to the same reserve deductions.
What to check
- What triggers a chargeback, and how much notice you receive
- Whether fees continue to accrue up to the chargeback date
- Whether charged-back invoices can be resubmitted once paid or resolved
- How chargebacks appear in your factoring statements