Finance term
Accounts Receivable (AR)
Also known as: AR, trade receivables, receivables
Definition
Accounts receivable (AR) is money owed to a business by its customers for goods or services already delivered but not yet paid for. AR appears as a current asset on the balance sheet and is the primary asset monetized through invoice factoring and invoice financing.
Detailed explanation
Accounts receivable represent the credit extended to customers — the gap between delivering value and receiving payment. When a B2B company invoices a client net-30, that unpaid invoice is AR. The balance grows with new invoices issued and shrinks as customers pay.
AR quality matters for business financing. Lenders assess: (1) customer concentration — AR dominated by one customer is riskier than a diversified base; (2) aging — AR over 90 days is typically considered 'diluted' and excluded from advance calculations in invoice factoring; (3) customer creditworthiness — government or Fortune 500 debtors carry more weight than unrated small businesses.
Invoice factoring converts AR into immediate cash: a factor purchases the receivable at a discount (typically 80–90% advance on face value), advancing the cash immediately and collecting from the customer directly. Invoice financing (also called AR lending) uses AR as collateral for a loan rather than selling the receivable outright.
The Federal Reserve's Flow of Funds (Z.1 release, https://www.federalreserve.gov/releases/z1/) tracks business accounts receivable at the sector level. The SBA's guidance on accounts receivable financing (https://www.sba.gov/business-guide/manage-your-business/manage-your-finances) includes AR management as part of cash flow best practices for small businesses.
◈ Worked example
- B2B service firm invoices $200K on net-30 terms in June → $200K AR on balance sheet; $0 cash received until July
- Invoice factoring: $200K AR sold to factor at 85% advance → $170K received today; factor collects from customer; factor remits remaining $30K minus fee when customer pays
- AR concentration risk: 90% of AR from one client → lender caps advance rate at 60% of AR (vs 85% for diversified AR)
Common questions
The most-asked questions about Accounts Receivable (AR) — answered straightforwardly.
What's the difference between invoice factoring and invoice financing? +
Invoice factoring is a sale — you sell the receivable to the factor, who takes ownership and collects directly from your customer. Invoice financing (or AR lending) is a loan — you borrow against the receivable as collateral, retain ownership, and collect from the customer yourself. Factoring is typically faster with looser credit requirements; financing preserves the customer relationship.
How does AR age affect financing eligibility? +
Most invoice factors and AR lenders exclude receivables over 90 days from their advance base. Receivables 60–90 days old often receive reduced advance rates (50–70% vs 80–90% for current AR). Keeping DSO low is essential to maintaining maximum AR borrowing base eligibility.
Further reading
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