Setoff
When a customer reduces payment by claiming the seller owes them money.
Why it matters
A setoff claim by the customer can reduce the amount collected, increasing the risk of a shortfall against the advance already paid.
How it appears in contracts
Setoff risk is addressed in the Representations and Warranties section, where the seller typically warrants that each invoice is free from 'any right of offset, deduction, counterclaim, or defense' at the time of sale. If that warranty proves false—because the customer did have a legitimate claim you were unaware of—it triggers a warranty breach that can be treated as a chargeback. In the Eligible Receivable definition, look for language that excludes 'invoices subject to setoff, credit, or adjustment'—this is where most factors draw the line on what they will purchase. Non-recourse agreements typically exclude setoffs explicitly from covered credit losses, meaning the seller bears setoff risk even under a non-recourse structure.
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.