Updated 2026-05-19

Credit memo

A document reducing the amount owed on an invoice.

Why it matters

A credit memo reduces the amount owed on an invoice, which reduces the amount the factor can collect on an assigned receivable. When a seller issues a credit memo on a funded invoice, the collectible amount decreases, creating a potential shortfall against the advance already made. Factors typically require notification when credit memos are issued on funded invoices within a defined reporting period. A credit memo that reduces the collectible balance below the advance amount creates an immediate overadvance obligation. High credit memo rates contribute to measured dilution, which factors monitor as an indicator of invoice quality across the program.

How it appears in contracts

Factoring agreements require sellers to report all credits and credit memos on assigned receivables promptly after issuance, often within three to five business days. The agreement defines how credit memos are handled: as a reduction to the invoice collectible balance, as a dilution reserve deduction, or as a chargeback trigger if the reduction is material. Undisclosed credit memos issued on funded invoices may constitute a misrepresentation under the agreement representations and warranties section. Sellers should retain documentation for each credit memo in case the factor requests it during audit or verification review.

Related terms

• Notice of assignment
• UCC-1
• Lockbox
• Assignment of receivables