Service credit
A customer credit that reduces what the customer owes for the invoice.
Why it matters
Service credits create dilution and can trigger reserve deductions when they are applied to funded invoices. They arise when the billed amount is reduced after delivery because the client claims the service did not fully meet contract standards. Unlike a dispute, a service credit may be issued voluntarily by the seller to preserve a client relationship, even when the underlying invoice was fully performed. Factors track service credit rates as a dilution indicator, and programs with frequent credits face higher reserve requirements over time.
How it appears in contracts
Service credits issued on funded invoices must be reported to the factor under the credit memo and dilution notification provisions of the factoring agreement. The agreement defines the reporting window—typically three to five business days—and the consequences of late or missing disclosure. A material service credit that significantly reduces an invoice balance may trigger a reserve hold or, if the reduction exceeds the advance rate on that invoice, an overadvance situation. Sellers should establish an internal process to flag funded invoices before issuing credits to ensure proper notification to the factor.
Related terms
Related reading
Sources
- International Factoring Association - International Factoring Association. Accessed 2026-05-19.
- Secured Finance Network - Secured Finance Network. Accessed 2026-05-19.