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. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to ...
  3. Accounts Receivable - AR

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

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

    A type of loan that is secured by collateral, which is usually ...
  6. Receivables

    An asset designation applicable to all debts, unsettled transactions ...
Related Articles
  1. Understanding The Cash Conversion Cycle
    Investing Basics

    Understanding The Cash Conversion Cycle

  2. Small Business: Speed Up Receivables ...
    Entrepreneurship

    Small Business: Speed Up Receivables ...

  3. Dynamic Current Ratio: What It Is And ...
    Fundamental Analysis

    Dynamic Current Ratio: What It Is And ...

  4. What Is A Cash Flow Statement?
    Markets

    What Is A Cash Flow Statement?

Hot Definitions
  1. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  2. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  3. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  4. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  5. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  6. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
Trading Center