What Happens If My Customer Doesn't Pay? Recourse, Non-Recourse and Bad Debt Protection Explained

First, the word that decides everything: recourse

Most invoice finance in the UK is provided with recourse, which means the risk of an unpaid invoice ultimately stays with you. If your customer has not paid after an agreed period, commonly around 90 to 120 days from the invoice date, the funder can pass the invoice back and recover the advance. Non-recourse facilities include bad debt protection: if the customer becomes insolvent, the loss is the funder's, not yours, in exchange for a higher fee. Which one you have is not small print, it is the answer to this entire article, and it is a term we compare deliberately when matching clients to providers.

Scenario one: the customer just pays late

The common case, and the gentle one. The invoice stays funded while the funder, under factoring, or your own team, under invoice discounting, keeps chasing. The practical costs of lateness are two. The discount charge keeps running on the advanced funds for as long as they are outstanding, so a slow payer literally costs you interest. And if the invoice crawls past the recourse period, many agreements apply a refactoring charge, an additional fee for the extended collection work, before the invoice is passed back at all. Worth knowing: funders' professional credit control frequently gets invoices paid faster than in-house chasing ever did, so a facility often shortens lateness rather than merely financing it.

Scenario two: the customer disputes the invoice

This is the scenario that catches businesses out, because no form of invoice finance, recourse or not, protects a disputed debt. If a customer refuses to pay because the goods were faulty, the work incomplete or the paperwork wrong, the funder will disapprove the invoice and recover the advance, since their security was a valid debt and a disputed one is not. Bad debt protection covers customers who cannot pay, never customers who will not pay for a reason. The defence is unglamorous: clean delivery, signed PODs or timesheets, accurate invoicing and disputes resolved fast. It is also why funders verify invoices before funding them, which, viewed generously, is a free early warning system for problems in your own paperwork.

Scenario three: the customer goes bust

The scenario the fear is really about. With recourse funding, the funder recovers the advance from you, typically by offsetting it against your other funded invoices rather than demanding a cheque, and you join the customer's other unsecured creditors in the insolvency, usually recovering little. Painful, but worth framing honestly: you are in exactly the position you would have been in with no funding at all, minus fees. Invoice finance did not create the loss; the customer did. With non-recourse funding, the protection pays out instead, typically covering the large majority of the invoice value, often 90 per cent or so of the protected amount, subject to the credit limit the funder had approved for that customer. The failure that would have taken your year's profit becomes a manageable bruise. According to the Insolvency Service, unsecured creditors typically recover only a fraction of what they are owed in formal insolvency proceedings.

Is bad debt protection worth paying for?

An honest broker's answer: sometimes, and it depends on your ledger. Protection earns its premium where customer concentration is high, where one insolvency would genuinely wound you, and where you sell into sectors with a lively insolvency record, retail and construction supply being the perennial examples, as our wholesale guide covers. It is poor value where your ledger is broad, your customers are strong covenants, or the premium outruns any realistic loss. There is also an underrated middle benefit: non-recourse funders set credit limits per customer and monitor them continuously, which means you effectively acquire a credit intelligence service, and a funder trimming a customer's limit is an early warning your own accounts team could never have sourced.

The questions to ask before you sign

Four, and they belong in every comparison. What is the recourse period, and what refactoring charges apply as it approaches? Is bad debt protection available, at what cost, and with what credit limits on my major customers? What exactly triggers a payout, and what is excluded? And how are disputed invoices handled in practice? Providers answer these very differently, the differences are precisely where facilities go wrong, and extracting the answers before commitment is a large part of what our matching service is for. It is free to use, and we will always tell you a commission arrangement exists with the provider.