Accounts Receivable Financing

AAA

DEFINITION of 'Accounts Receivable Financing'

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".

BREAKING DOWN 'Accounts Receivable Financing'

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.

RELATED TERMS
  1. Working Capital

    This ratio indicates whether a company has enough short term ...
  2. Capital

    1) Financial assets or the financial value of assets, such as ...
  3. Vendor Note

    A type of debt instrument used in a particular type of short-term ...
  4. Accounts Receivable - AR

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

    1) The financial activities related to running a corporation. ...
  6. Asset Financing

    Using balance sheet assets (such as accounts receivable, short-term ...
Related Articles
  1. Investing Basics

    Will Corporate Debt Drag Your Stock Down?

    Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference.
  2. Fundamental Analysis

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  3. Entrepreneurship

    7 Unconventional Ways Businesses Can Borrow Money

    Find out how your business can get the money it needs - even when the bank says "no".
  4. 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.
  5. Economics

    How Does a Credit Facility Work?

    A credit facility is a loan or collection of loans a business or corporation takes to generate capital over an extended period of time.
  6. Professionals

    Worried About Bond Market Liquidity? Try ETFs

    If you're looking for liquidity in the bond market, then turn to bond ETFs. Here is an analysis of 11 to consider.
  7. Credit & Loans

    What's a Bridge Loan?

    A bridge loan is a loan that “bridges” a borrower over a temporary shortage in funds on hand.
  8. Fundamental Analysis

    Calculating the Net Debt to EBITDA Ratio

    Financial analysts typically use the net debt to EBITDA ratio to determine a company’s ability to pay its debt.
  9. Credit & Loans

    What is a Syndicated Loan?

    A syndicated loan is one that involves a group of lenders (called the syndicate) who pool their lending resources to make a loan.
  10. Fundamental Analysis

    Financial Analysis: Solvency Vs. Liquidity Ratios

    Solvency and liquidity are equally important for a company's financial health. A number of financial ratios are used to measure a company’s liquidity and solvency, and an investor should use ...
RELATED FAQS
  1. How does a company obtain a bank guarantee?

    A bank guarantee serves as a promise from a commercial bank that the liability of a particular debtor will be met if contractual ... Read Full Answer >>
  2. How accurate or important is the debt service coverage ratio (DSCR) in evaluating ...

    Both creditors and investors use the debt service coverage ratio, or DSCR, when analyzing the financial condition of a company. ... Read Full Answer >>
  3. What is the difference between the debt ratio of a company and the debt ratio of ...

    The difference between the debt ratio of a company and the debt ratio of an individual is primarily one of scale and complexity. ... Read Full Answer >>
  4. What's the difference between a credit bureau and a credit rating agency?

    Individual consumers and corporations both carry credit scores and credit history reports that illustrate to lenders how ... Read Full Answer >>
  5. Does a good credit rating guarantee repayment?

    An issuer's credit rating cannot guarantee repayment of any debt obligation, but it can give investors a good idea of the ... Read Full Answer >>
  6. What happens to a company's stocks and bonds when it declares chapter 11 bankruptcy ...

    Filing for chapter 11 bankruptcy protection simply means that a company is on the verge of bankruptcy, but believes that ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Recession

    A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, ...
  2. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  3. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  4. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  5. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  6. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
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!