Sellers sell individual or multiple outstanding invoices to a Funder at a discount. This allows the Seller to receive cash payment for these invoices prior to their original maturity date at a lesser value.
Receivables Discounting is normally structured under a Receivables Purchase Agreement (RPA) between Funder and Seller. The RPA may define a ‘true sale’, without recourse financing structure, meaning the rights and title to the receivables are transferred to the Funder; otherwise the RPA may define a recourse based model where the Seller no longer has rights to the receivables but is still liable for any maturity payments. A limited recourse model is also quite common, where the Seller is no longer liable for Buyer risk of default, but Funder still maintains recourse against the Seller’s ability to meet the stipulations of the Buyer contract (i.e., dilutions, charegacks, etc.).
Receivables Discounting may be done on a disclosed or undisclosed basis to the Buyer (but most often disclosed unless there is recourse to a credit worthy Seller in a favorable legal jurisdiction).