Accounts Receivable Financing

Accounts receivable financing is the selling of a company's accounts receivable, at a discount, to a factor, who then assumes the risk of the account debtors and receives cash as the debtors settle their accounts. A firm that sells its accounts receivable may not be confident of its ability to collect those debts, or might think that the cost of collecting that debt is more than the discount which must be provided to the factor when of selling their receivables, also called accounts receivable financing.

Accounts receivable financing is a type of asset-financing arrangement in which a company uses its receivables - which is money owed by customers - as collateral in a financing agreement. The company receives an amount that is equal to a reduced value of the receivables pledged. The age of the receivables have a large effect on the amount a company will receive. The older the receivables, the less the company can expect. Also referred to as "factoring".

This type of financing helps companies free up capital that is stuck in accounts receivables. Accounts receivable financing transfers the default risk associated with the accounts receivables to the financing company; this transfer of risk can help the company using the financing to shift focus from trying to collect receivables to current business activities.


 

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