What Happens If a Customer Doesn't Pay a Factored Invoice?

The Department for Business and Trade put the cost of late payment to the UK economy at almost £11bn a year in July 2025, with around 38 businesses closing every day as a result. Factoring is often sold as the cure, and for slow payment it largely is. For a customer who does not pay at all, what happens next depends on one clause in your agreement: whether the facility is with recourse or without.

The normal collection cycle on a factored invoice

Under a full factoring facility the provider runs collections. A typical cycle for an invoice on 30-day terms looks like this:

1. Day 0: invoice assigned

   You raise the invoice, upload it to the provider's portal and receive the advance. The invoice carries a notice telling the customer to pay the provider.

2. Days 7 to 25: verification and statement

   The provider may verify the invoice with the customer, then sends a statement before the due date.

3. Days 30 to 60: reminders

   Once overdue, the provider's credit control team sends reminders and telephones the customer's accounts department, escalating as time passes.

4. Days 60 to 90: formal demand

   A final demand or letter before action is issued. At this stage the provider will usually ask you what you know about the customer and whether there is any dispute.

Most invoices are paid in the second or third step. The provider's collection activity is one reason factored ledgers often show shorter debtor days than the same business managed alone.

Disputes versus genuine non-payment

Before anything else, the provider will want to know why the customer has not paid. The answer changes everything.

A disputed invoice is one the customer refuses to pay because of a problem with the goods or service: short delivery, defective work, a pricing disagreement, a missing purchase order. Providers fund invoices on the basis that they are valid and undisputed, so a disputed invoice is normally removed from the funded ledger straight away and the advance reversed, regardless of the recourse period. The dispute is yours to resolve; once settled, a corrected invoice or credit note can be submitted.

Genuine non-payment is where the customer accepts the debt but does not pay: cash flow problems, poor administration, or the early stages of insolvency. This is what the recourse period and bad debt protection are designed for.

The recourse period

Every recourse agreement sets a period after which unpaid invoices are handed back, commonly 90 to 120 days past the invoice due date (some providers measure from the invoice date, which is shorter in effect). Until then the provider continues to chase and the advance remains in place. After it, the invoice is "recoursed".

How recourse is applied in practice

Recourse rarely means a demand for a cheque. Providers normally recover the advance in one of three ways:

• Reduced availability. The invoice is removed from your funded ledger, so the advance already paid is now drawn against your other invoices and the amount you can draw falls by the same figure. This is by far the most common route, and the one businesses notice least until availability runs out.
• Replacement invoices. New invoices you assign fill the gap. If you are invoicing steadily, the recoursed amount is absorbed over the following weeks.
• Repayment. If there is not enough availability to absorb the reversal, the provider asks for the shortfall in cash, usually within a short period. This is what gets businesses into difficulty, especially where one large invoice has been recoursed.

Whichever route applies, the discount charge keeps accruing for every day the funds are outstanding, so a recoursed invoice has already cost more than a normal one.

Refactoring fees

Many agreements add a refactoring fee when an invoice is recoursed: commonly a percentage of invoice value, charged on top of the service fee and discount charge already incurred. On a £10,000 invoice the three together can easily exceed £500, for an invoice on which you have received nothing. It is one of the charges most often negotiated down; our recourse factoring page explains how it is structured.

The non-recourse route: bad debt protection and claims

With non-recourse factoring, or a recourse facility with bad debt protection added, the provider carries the credit risk on approved customers. The cover is not unlimited, and the conditions matter:

• The customer must have been approved by the provider with a credit limit, and the unpaid amount must fall within it. Anything above the limit is at your risk.
• The trigger is normally insolvency (administration, liquidation, a CVA) and sometimes protracted default, where an undisputed invoice remains unpaid for a set period, often 120 to 180 days.
• Disputed invoices are excluded, as are losses caused by your own breach of contract.
• Some policies pay only a percentage of the loss (often 90%) or apply a first-loss excess.
• The premium is typically 0.5%–1% of insured turnover, on top of the ordinary charges.

A claim usually requires the invoice, proof of delivery, correspondence and evidence of the insolvency, and can take some weeks to settle; meanwhile the provider normally maintains the advance rather than recoursing the invoice. The recourse vs non-recourse comparison helps decide whether the premium is worth paying.

What happens when a customer becomes insolvent

Once a customer enters a formal insolvency process, collection stops and the provider (or you, if the invoice has been recoursed) becomes an unsecured creditor. Unsecured creditors in UK insolvencies frequently recover only a few pence in the pound, and often nothing. On a recourse facility the loss is yours; with bad debt protection, the insolvency is the event that triggers the claim.

If you hear of a customer's insolvency, tell the provider immediately, stop supplying on credit, and submit a proof of debt to the insolvency practitioner even if you expect to claim under the cover.

Statutory late payment interest and compensation

Business-to-business invoices in the UK carry a statutory right to interest and compensation under the Late Payment of Commercial Debts (Interest) Act 1998. Per gov.uk guidance, the rate is 8% a year over Bank of England base rate, plus fixed compensation per invoice of £40 (debts under £1,000), £70 (£1,000 to £9,999.99) or £100 (£10,000 and over), with reasonable recovery costs on top.

On a factored invoice the right to collect the debt, and usually the interest with it, is assigned to the provider. Some pursue interest on debts that go to formal recovery; most do not add it to routine reminders. If the invoice is recoursed to you, the right returns with it, and the compensation figures are a useful lever in a final demand.

Practical steps when a customer goes quiet

1. Tell the provider what you know. If you have heard the customer is in trouble, or there is an unmentioned dispute, say so early. Providers respond badly to surprises.
2. Check the paperwork. Purchase order, signed delivery note or timesheet, correct invoice address. Many "non-payments" are invoices stuck in an approval queue for want of a PO number.
3. Resolve disputes fast. Every week a disputed invoice sits unfunded is a week of reduced availability.
4. Model the recourse. Work out what availability would look like if the invoice were reversed. If the answer is a cash shortfall, talk to the provider before the recourse date, not after.
5. Review the customer's limit and stop extending further credit until the position is clear.
6. Diversify. A recoursed invoice from a customer who is 5% of your ledger is an irritation; from one who is 40%, it can be fatal.

Example timelines: recourse and non-recourse

Both timelines follow the same £20,000 invoice on 30-day terms, funded at 85%, where the customer enters administration four months after the due date.

Frequently asked questions