Commercial finance glossary
Trade receivables
The term trade receivables refers to the amounts due to a business following the sale of goods or services to another company.
A subcategory of accounts receivable, trade receivables are considered a current asset on a company's balance sheet, as they can be readily converted into cash.
In the normal operation of a business, trade receivables are created through the raising of an invoice, recorded on the sales ledger and issued to a customer, to be paid within an agreed timeframe.
The number of days within which this amount is due depends on the credit policy of the business making the sale and the nature of the company making the purchase.
A small company which has no previous purchase history may not be offered terms as favourable as those offered to a larger company which has been trading with the supplier for many years.
Trade receivables financing
Trade receivables are often used to generate extra working capital through the practice of factoring.
A form of sales finance, factoring involves receiving a flexible loan, relative to the value of invoices raised.
Sometimes known as accounts receivable factoring, borrowing against trade receivables allows a company to increase day-to-day cash-flow, improving its ability to fulfil further orders and meet the daily operating costs of the business.
Unlike a conventional business loan or overdraft, the value of which is established prior to borrowing, factoring trades receivables enables a company to increase the amount borrowed in line with the value of sales it creates.
