Accounts receivable (often shortened to AR or receivables) is the total a business is owed by customers who have already received its goods or services but have not paid yet. On the balance sheet it sits as a current asset, because the business expects to turn it into cash within a normal billing cycle.
How it works in factoring
Receivables are the raw material of factoring. Each unpaid invoice represents a right to collect money from a customer, and that right can be sold or pledged. In a factoring arrangement, the business sells some or all of its receivables to a factor, which pays most of the face value up front and collects from the customer later. The customer who owes the money is called the account debtor.
Not every receivable is equally useful. Factors generally prefer invoices that are:
- For work that is complete and accepted, not partial or disputed
- Owed by commercial or government customers with a record of paying
- Free of other liens, offsets or contra balances
- Within a normal age range, not long past due
Under the Uniform Commercial Code, an "account" is a defined type of property, and a sale of accounts is treated much like a secured loan for filing and priority purposes.
Why it matters
A business can look profitable on paper and still run short of cash because its money is tied up in receivables. Knowing the size, age and quality of your AR tells you how much financing you could realistically raise against it, and which invoices a factor is likely to accept or exclude.