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".

Investopedia Says:

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 Links:
Pressure to be the best can sometimes push corporations to cheat. Learn how they do it and how to spot it. How Some Companies Abuse Cash Flow
Here we explain how to evaluate whether a company's debt will pose a threat to investors. When Companies Borrow Money
We look at a retailer's inventory turnaround times, its receivables as well as its collection period. Measuring Company Efficiency

Form of secured lending giving businesses short-term financing by selling their trade receivables or pledging receivables as collateral for a loan. Direct sale of accounts receivable is a nonrecourse type of financing called Factoring. An accounts receivable loan from a bank is a Discount: the borrower draws against a line of credit that is less than the full dollar value of his trade credits. Accounts receivable financing is a rather flexible way of obtaining credit, since borrowers' financing costs are directly related to their business cycle. Receivables financing is often priced at spreads above the bank Prime Rate and is relatively expensive compared to other forms of credit. See alsoBorrowing Base; Inventory Financing; Security Interest.