Accounts-receivable financing is a type of asset-financing arrangement in which a company uses its receivables — outstanding invoices or money owed by customers — to receive financing.
when a business sells its AR (accounts receivable) to a factoring company and receives short-term business funding in return, this is what called as Accounts Receivable Financing.
How it works ::
Business-to-business sales are often offered with payment terms of 30, 60 or 90 days.
The buyer receives the product, but doesn't submit payment until the mutually agreed-upon date.
The seller records the sale as revenues and increases the accounts receivable by the amount of the sale.
When the payment arrives, the seller decreases the accounts receivable and increases cash.
Accounts receivable financing allows the seller to get the cash immediately by selling the receivable to a third party. This is called factoring.