Accounts receivable financing

What does Accounts receivable financing mean in American Law?

The definition of Accounts receivable financing in the law of the United States, as defined by the lexicographer Arthur Leff in his legal dictionary is:

A method of receiving ready cash for one’s accounts receivable before they are payable. Assume that a business enterprise is owed $10,000, payable ninety days in the future. It could make good use of that $10,000 now, perhaps to buy for a good cash price more goods to sell during a busy season. It may, therefore, sell its accounts receivable, i.e., sell its right to receive the payment thereof when it is due. This is ordinarily called factoring. Or it may merely pledge its accounts receivable,

as security for a loan. This is also sometimes called factoring, but also called discounting. In either case, of course, the firm will not receive the full face value of its accounts. The financing party is foregoing the use of its money while it awaits the accounts’ payment, and it will naturally want to get paid for that, as well as for the risk that it will not get paid at all. Hence it will charge “interest,” either explicitly or by advancing or paying less than the face value of the accounts purchased, i.e., taking them at a discount. How much will be charged depends on general interest rates, and on the likelihood that the accounts will be paid either by the account debtors

or by the account creditor from whom the accounts were bought. The extent of that non-payment risk depends, of course, on the creditworthiness of the account debtors and of the creditor, and on the terms of the agreement between the financing party and the seller or pledgor of the accounts. If, for instance, the financing party is not to have any recourse against the seller with respect to unpaid accounts, then he will charge more for the increased risk of non-repayment. It should also be noted that when accounts are “sold,” but there is recourse against the seller for any amounts not collected, the “sale” is hard to distinguish from a pledge.