Accounts Receivable (A/R) Discounted

AAA

DEFINITION of 'Accounts Receivable (A/R) Discounted'

Outstanding invoices representing money owed to a creditor which the firm/creditor sells to a buyer for less than face value, typically to quickly raise capital and improve cash flow. The buying firm - also referred to as a "factor" - purchases the financial obligation at a discounted rate providing the selling firm with immediate cash. However, the sale is undertaken without recourse, meaning that the factor assumes full responsibility for collecting the money owed in order to recoup its financial layout for the account.

INVESTOPEDIA EXPLAINS 'Accounts Receivable (A/R) Discounted'

Accounts receivables are often sold at a discount in order to mitigate the risk that the debtor will not satisfy the obligation. The discount arises because the factor assumes the underlying risk of the receivables and must be compensated for the delayed inflow of funds.

Previously only large firms that could meet minimum threshold requirements could enter into a relationship with a factoring firm (typically a large bank) to sell their receivables and obtain much-needed cash, and often with recourse. Today, medium- and small-sized firms operating in virtually all industries (i.e. IT firms, manufacturers, even hospitals) can find ways to sell their A/Rs for a discounted rate to individual factoring firms or through factoring broker intermediaries.

RELATED TERMS
  1. Invoice

    A commercial document that itemizes a transaction between a buyer ...
  2. Net Receivables

    The total money owed to a company by its customers, minus the ...
  3. Non-Recourse Debt

    A type of loan that is secured by collateral, which is usually ...
  4. Accounts Receivable - AR

    Money owed by customers (individuals or corporations) to another ...
  5. Receivables

    An asset designation applicable to all debts, unsettled transactions ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to ...
RELATED FAQS
  1. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
  4. Why can additional paid in capital never have a negative balance?

    The additional paid-in capital figure on a company's balance sheet can never be negative because companies do not pay investors ... Read Full Answer >>
  5. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Understanding The Cash Conversion Cycle

    Find out how a simple calculation can help you uncover the most efficient companies.
  2. Entrepreneurship

    Small Business: Speed Up Receivables To Avoid A Cash Crunch

    Waiting for customers to pay can be a losing game. Look to factoring for quicker cash.
  3. Fundamental Analysis

    Dynamic Current Ratio: What It Is And How To Use It

    Learn why this ratio may be a good alternative to the current, cash and quick ratios.
  4. Markets

    What Is A Cash Flow Statement?

    Learn how the CFS relates to the balance sheet and income statement as a part of a company's financial reports.
  5. Markets

    Cash Flow On Steroids: Why Companies Cheat

    Pressure to be the best can sometimes push corporations to cheat. Learn how they do it and how to spot it.
  6. Bonds & Fixed Income

    Distressed Debt An Avenue To Profit In Corporate Bankruptcy

    Use debt securities to attack bankrupt companies and scavenge them for profits.
  7. Entrepreneurship

    The Impact Of Recession On Businesses

    Find out how this economic cycle affects both small and big business.
  8. Fundamental Analysis

    Making Sense of Netflix's Balance Sheet

    Understand how to assess Netflix's performance based on the major components of its balance sheet.
  9. Professionals

    Are Stock Buybacks Always Good for Shareholders?

    Stock buyback programs aren't always done with the interests of shareholders in mind. It's important to try to understand the motivation behind such moves.
  10. Economics

    Understanding the Top Line

    Top line refers to a company’s gross sales without any reductions for discounts or returns.

You May Also Like

Hot Definitions
  1. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  2. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  3. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  4. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  5. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  6. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!