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.

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