Receivables finance unlocks the cash that is owed to the small company by selling the invoice. So, technically it is not lending, but an asset purchase. You are raising cash against your debtors. “Accounts receivable” is more of an expression used in the United States than the UK.
There are two types of account receivables finance:
First there is invoice discounting, a form of asset based finance which enables a business to release cash tied up in an invoice and unlike invoice factoring enables a client to retain control of the administration of its debtors.
Secondly, there is factoring. Accounts receivable factoring is usually used by companies that are smaller than those that use invoice discounting. The difference between factoring and invoice discounting is that the credit control function in a factoring facility is outsourced and that the facility is disclosed. Factoring is the sale of receivables, whereas invoice discounting is borrowing where the receivable is used as collateral.