Accounts receivable funding, or AR financing, creates cash for your business by selling its accounts receivable. These are sold at a discounted price to a factor, a financing company specializing in accounts receivable funding. The factor assumes the risk that the debtors--those who owe the money in the first place--may not settle their accounts.

If your business has a lot of accounts receivable--money owed to it for services or products--and you don't have the time, resources, or staffing to collect, you may want to sell your accounts receivable. This is known as accounts receivable funding, or factoring. In exchange for the headache of collecting these payments, you sell what's owed to you for cash--although lower than the face value of the debt--which you can immediately put back into your business.

Why would a business want to sell assets at a discounted price? For one thing, a company might think that the cost of collecting the debt--manpower and other resources--is more than the discount for which they are selling them. Or they might not be confident in their company's ability to successfully collect each outstanding debt.

Variations of Accounts Receivable Funding

Another option to turn your accounts receivables into capital is to use them as collateral. Since accounts receivables are assets with a monetary value, you can offer them as collateral for a business loan. Of course, the loan would only cover a percentage of what is owed to you, but you could quickly reinvest that loan into your business and pay it off when the debts are finally collected.