Trade receivables are the amounts customers owe a business after buying goods or services on credit. They’re a subset of accounts receivable — the part that comes from core trading activity — and they’re usually one of the largest current assets on a B2B balance sheet.
What They Are #
When a business sells to another business on credit, the seller records a trade receivable. The goods or services have been delivered, but the cash hasn’t arrived yet. Until the customer pays, that receivable sits on the balance sheet as an asset: money the seller is legally owed, but can’t touch yet.
Trade receivables are different from other receivables — tax refunds, loan receivables, intercompany balances. They come directly from commercial sales, which makes them enforceable obligations. That distinction matters when you’re looking at financing options.
For many B2B businesses, trade receivables account for 20–40% of total assets.
Trade Receivables on the Balance Sheet #
Trade receivables are a current asset. The company expects them to convert to cash within 12 months (or within the normal operating cycle). They’re shown net of a bad debt provision, which is the company’s estimate of what it won’t collect.
Net Trade Receivables = Gross Trade Receivables − Bad Debt Provision
The bad debt provision is based on historical collection rates and known risks. When it grows relative to gross receivables, collection performance is deteriorating.
What Drives Trade Receivables Performance #
| Driver | Impact |
|---|---|
| Payment terms offered | Longer terms increase receivables and DSO |
| Customer credit quality | Weaker credit means higher bad debt risk |
| Collections efficiency | Faster follow-up means faster collection and lower DSO |
| Invoice accuracy | Disputes delay payment; clean invoices get paid faster |
| Industry norms | Some industries run on inherently long payment cycles |
Financing Trade Receivables #
Trade receivables are financeable assets because they’re short-duration and enforceable. Several common structures exist:
Invoice financing (receivables finance). A business borrows against approved trade receivables — typically 80–90% of face value. The receivable stays on the balance sheet as collateral. When the customer pays, the advance gets repaid. The business keeps its customer relationships and handles collections itself.
Factoring. A business sells its receivables to a financier at a discount. The receivable comes off the balance sheet. The financier collects from the customer. This works well for businesses that want the receivable removed from the balance sheet and don’t want to manage collections.
Selective receivables finance. Instead of financing the entire receivables book, a business picks specific invoices — usually the largest or slowest-paying ones. This gives more flexibility and typically costs less.
Receivables securitisation. For large programs, trade receivables can be pooled and sold to a Special Purpose Vehicle (SPV), which issues notes to investors. This is mainly a large-corporate approach.
| Type | Source | Financeable? | Balance Sheet |
|---|---|---|---|
| Trade receivables | Core commercial sales | Yes | Current asset |
| Intercompany receivables | Transactions between group entities | No | Current or non-current |
| Tax receivables | VAT refunds, tax credits | No | Current asset |
| Loan receivables | Money lent to third parties | No | Current or non-current |
| Other receivables | Deposits, prepayments, sundry | Rarely | Current asset |
Securitisation and Receivables Programmes #
Large corporates with predictable, high-volume trade receivables sometimes set up dedicated purchase programs — ongoing facilities where new receivables are automatically sold to a financing vehicle as they’re created. This creates a continuous source of liquidity.
Key features of receivables purchase programs:
- Committed facility — a pre-agreed volume the financier will buy
- Eligibility criteria — receivables must meet minimum quality standards (customer credit rating, maximum invoice age, and so on)
- Concentration limits — no single customer can exceed a defined percentage of the pool
- Dilution monitoring — credit notes, disputes, and returns are tracked to keep the pool healthy