Accounts receivable discounted are unpaid billings to customers that have been sold to a third party in exchange for cash. These billings are sold off at a reduction from their face value so that the seller can gain immediate access to cash, thereby improving its cash flow. The buyer of discounted accounts receivable is known as a factor, and earns back the money paid to the seller of the receivable by collecting the receivable. The factor is at risk of loss if it cannot collect on a receivable, since the seller is not liable for uncollectible billings.
The discounting of receivables can be quite expensive for the seller of receivables, so this is considered to be a lesser financing strategy for most firms. It works best when a company earns a high margin on its sales, so that it can absorb the large discounts applied by factors.