What are 'Accounts Receivable (A/R) Discounted'

Accounts receivable discounted refers to 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. The vendor/debtor who owed the selling firm money per the receivable would direct its payment to the factor who purchased the financial obligation.

BREAKING DOWN 'Accounts Receivable (A/R) Discounted'

Accounts receivable 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. Factor

    A factor is a financial intermediary that purchases receivables ...
  2. Discounting

    Discounting is the process of determining the present value of ...
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks ...
  4. Rate of Return

    A rate of return is the gain or loss on an investment over a ...
  5. Accounts Receivable Financing

    Accounts receivable financing is a type of asset-financing arrangement ...
  6. Accounts Receivable Aging

    Accounts receivable aging is a report categorizing a company's ...
Related Articles
  1. Investing

    Accounts Receivable

    Accounts Receivable (A/R) is an accounting term used to refer to the money that is owed to a company by its customers.
  2. Financial Advisor

    A Guide on the Risk-Adjusted Discount Rate

    When a project or investment faces higher amounts of risk or uncertainty, it may be appropriate to utilize the risk-adjusted discount rate.
  3. Small Business

    Top 10 Ways to Improve Your Business's Cash Flow

    Improving cash flow from receivables provides more capital for day-to-day operations and innovation. Here are 10 ways to do it.
  4. Retirement

    Senior Discounts Alert: National Parks Pass Rises Aug. 28

    First, Social Security rose a measly 0.3%. Now, the national parks lifetime pass is going up 8 times. Yet another reason to save with senior discounts.
  5. Personal Finance

    9 Student Discounts You Shouldn't Miss

    College students can always stand to save some cash. Here are nine discount opportunities students should explore and exploit.
  6. Investing

    5 Misconceptions About Discount Brokers

    While discount brokers are the perfect choice for some investors, their business model could be detrimental to others.
  7. Investing

    10 Ways to Loosen Up Your Cash Flow

    Cash flow is king. Here are a few ways to fatten it up.
  8. Financial Advisor

    How Brokerage Fees Work

    What you need to know about fees when choosing between a full service and discount broker.
  9. Investing

    Apple Could Earn as Much as $8B From AR Apps: BofA

    Apple could bring in as much as $8 billion in AR revenue thanks, predicts a research report.
RELATED FAQS
  1. How long can accounts receivable be outstanding?

    Learn about a company's accounts receivable, including how long it can remain outstanding, and how their payment or lack ... Read Answer >>
  2. Why does the time value of money assume that a dollar today is worth more than a ...

    Learn about time value of money, or TVM, and how a present value calculator is used to determine the value of money received ... Read Answer >>
Trading Center