Updated 2026-05-19

Bad debt

An invoice that probably will not be collected.

Why it matters

Bad debt charged back under a recourse arrangement creates a cash obligation for the seller—the advance must be repaid even though the customer never paid. Under non-recourse factoring, bad debt from credit-approved account debtors may be absorbed by the factor, but operational non-payment scenarios such as disputes, quality issues, and service failures are typically excluded from non-recourse protection. Understanding exactly what constitutes bad debt under a non-recourse program—and what is excluded—is essential before relying on non-recourse coverage as a credit protection strategy.

How it appears in contracts

Bad debt treatment in factoring agreements is defined in the Recourse or Non-Recourse section. Under full recourse, all uncollectable invoices are charged back to the seller regardless of cause. Under non-recourse, the agreement specifies the covered events: typically commercial credit insolvency of the account debtor only, not dispute-related non-payment. The agreement should define what documentation is required to establish that a non-payment event falls within the non-recourse coverage. Sellers relying on non-recourse coverage should review the definition carefully before assuming protection.

Related terms

• Advance rate
• Reserve
• Recourse
• Chargeback