Debts Owed To a Business Are Referred To As What? Find Out Now


If you own a business—and especially if you own a service-based business—it’ll eventually come about that somebody, somewhere, owes you money.

But what is that actually called? Debts owed to a business are referred to as what?

These debts owed to your business are referred to as accounts receivable, and if you’re not paying attention, poorly managed accounts receivable can quickly snowball into a major cash-flow issue for your business.

While there’s nothing inherently wrong with an invoice-based business model, it’s incredibly important as a business owner that you understand exactly what debts are owed to your business and how to improve your collections process in order to maintain positive cash flow.

Balance Sheet Basics

Before we dig too far into the details of accounts receivable, it’s important that you have a solid understanding of financial management in general.

If you’ve ever taken an accounting course or have been managing your business finances for a while, you can probably skip this section.

But if you’re relatively new to managing business financials, or you’re feeling a little rusty, this quick review will help to get you up to speed.

Terms to Know

For novice entrepreneurs with little to no business education, the terms that often fly around related to small business finance can leave you downright lost.

In order to best answer the question “Debts owed to a business are referred to as what?”, let’s start with a basic primer of the accounting terms you’ll need in your back pocket.

Assets: This is everything on the positive side of your balance sheet, including any and all resources owned by your company that can be assigned a dollar amount for future economic value. This umbrella category includes your cash on hand, accounts receivable, equipment, inventory, investments, and property owned by the business.

Liabilities: This term covers all debts owned by a business, incurred over the course of business operations. It includes taxes, personnel costs, debts to vendors, loan repayments, and other outstanding expenses.

Revenue: The total amount of income your business brings in through sales of products and services, and invoice payments received over a given period (usually listed as monthly, quarterly, or annual).

Expenses: All costs associated with operating your business over a given period, including payroll, cost of inventory or raw materials, contractor fees, rent on a retail space, loan payments, and more (usually listed as monthly, quarterly, or annual).

Net Profit: Also known as your net income or net earnings—net profit is essentially what’s left over after you deduct your expenses from your total revenue. When this is a positive number, it means that your revenue is greater than your expenses and your business is profitable.

Accounts Receivable: Includes all debts owed to your business in the form of outstanding invoices for services you’ve already completed or products you’ve already delivered. This is the answer to our big question: “Debts owed to a business are referred to as what?”

Accounts Payable: Describes all money a business owes to vendors and suppliers for purchases of goods and services made on credit. Often listed in sum on the balance sheet as “current liability.”

Cash Flow: The net difference between the available cash at the beginning of an accounting period compared with the end of the period. Cash comes in from sales, loan proceeds, investments, and accounts receivable, and goes out through payroll, loan payments, and other accounts payable for operating and direct expenses.

Accounting Tools

Many new business owners are surprised to learn that the hardest part of managing the debts owed to your business can actually be just keeping track of them!

Managing your assets, liabilities, payables, and receivables manually can quickly add up to an unmanageable, overwhelming task.

Thankfully, though, there are several great accounting software options available that’ll take the guesswork out of your bookkeeping and generate these accounting documents automatically.

Here’s a quick look at our favorite cloud based accounting options for small business owners:


If just the idea of accounting software makes your blood pressure rise, Freshbooks might be exactly what you’re looking for.

It has an approachable look and feel, with all the features most small businesses need without additional confusing add-ons. Also, the top notch support team at Freshbooks is highly knowledgeable and responsive, making this service ideal for novice entrepreneurs.


Considered the gold standard of accounting software, Quickbooks has all the bells and whistles any small business could ever need. Plus, Quickbooks also offers integration with over 150 business apps, meaning the opportunities to customize your workflow are endless.

The downside for rookie business owners is that all those features make for a complicated interface and a steep learning curve when you’re just starting out. So before you jump to this tool as your first choice, check to see how many of Quickbooks’ additional features will actually be useful for your business.

Wave Accounting

If a few basic accounting features are all you need, you might be able to make do with Wave’s free cloud-based program.

Then, as your business grows and needs a few more accounting tricks, Wave’s paid service also offers additional features that serve as a mid-point between Quickbooks Online and Freshbooks.

Working With a Certified Professional Accountant

While the right software can do wonders to help you manage your small business finances, there are some areas of small business accounting beyond the capacity of the average small business owner.

Particularly if managing the debts owed to your business has you feeling overwhelmed, it’s in your best interest to consult a professional accountant to review your books and make recommendations for debt management and other major financial decisions.

Ask your attorney, banker, or a business for a recommended accountant, or contact the Society of Certified Public Accountants in your state for a referral.

Alright—that’s it! You’ve had your quick refresher into Small Business Accounting 101. Now that we’re all on the same page, let’s dig into why you’re really here—to get a handle on your business debts.

Processing the debts owed to your business all comes down to two words: cash flow.

In this next section, we’ll dive deeper into one of the two main components of your cash flow—accounts receivable.

Debts Owed to a Business Are Referred To As What? Answer: Accounts Receivable

The single greatest cash flow killer out there comes in the form of delayed accounts receivable—also known as unpaid invoices.

Particularly if you run a small B2B business, you’re likely to suffer from delayed payments from your clients, which can eventually turn into you paying your own vendors in a less than timely fashion. Not being proactive about collecting payments from your clients will put you on the fast track for a dangerous cash flow situation.

If delinquent receivables are a major factor in your debt management equation, follow these tips to increase your chances of getting paid on time.

1. Check Prospective Customers’ Credit

Most chronically late payers aren’t delinquent with just one vendor. The worst offenders typically have a well documented history of paying late.

That’s good news for you, because it means you have the opportunity to identify those individuals before they become your clients.

Perform a credit check to see your prospective customer’s credit rating and payment history. Business credit agencies like Dun & Bradstreet offer business credit checks for between $90 and $120.[1] If you see long outstanding payments or a history of late payments, you might reconsider whether that contract is worth taking on.

2. Itemize Your Invoices

Especially if you work in a B2B industry, it’s important to keep in mind that the person processing invoices and signing checks might not be the same contact you’ve been working with day-to-day. If your invoices are vague or require a lot of context to understand, your client’s bookkeeper will need extra time to ask questions or clarify charges before paying your bill.

To avoid these delays, make invoices as explicit and detailed as possible.

Describe how billable hours were spent. List unit costs for products. Assume that the person processing the invoice has no prior knowledge of your business or your relationship with the company, then aim to answer any and all potential questions within the original invoice.

3. Switch to Digital Invoicing and Online Payments

With the rest of the world accustomed to receiving and paying bills on their mobile devices from wherever they are, expecting your customers to keep up with hard copy invoices is a recipe for disaster. Sending invoices to customers over snail mail is a guaranteed recipe for lagging receivables!

And while you’re transitioning to digital invoicing, why not go ahead and add an online payment option?

Accounting softwares like Freshbooks and Quickbooks Online offer user-friendly digital invoicing options that integrate with tools like PayPal, WePay, or Square to make it easy for your clients to send you payment in moments, without waiting to cut a check.

Just think—your customer could potentially receive an invoice in their inbox moments after you send it, click a few buttons to pay online, and you could have payment within minutes.

Of course, not every client will actually process payment that quickly… But the more complexities you can take away from the invoice payment process, the better your chances will be of getting cash in hand on time.

4. Clarify Payment Policies

No matter what helpful tools you put in place to make paying on time easier, you’ll eventually face one or several late payers.

When that happens, you’ll need a clear and direct payment policy that includes penalties for past due payments. These penalties serve both to deter late payers and to compensate you for any losses you might face as a result of the late payment.

In every client’s contract, every invoice, and every payment reminder, give clear written guidelines for what penalties will be incurred if clients fail to pay on time. Clarifying the rules in writing gives you a clear policy to invoke when you do encounter a late-paying customer.

5. Create a Follow Up Timeline

Your payment policy can’t be effective if it isn’t enforced, so decide exactly how you’ll follow through with clients at every touchpoint in your receivables timeline.

How frequently will you issue invoices? How long afterward will payment be due? How many payment reminders will you send, and when? What are your policies when a payment deadline has been missed?

Set clear internal policies answering each of these questions and more—and apply that timeline to every client.

Some accounting tools will send you automatic reminders to follow through with your receivables process, making it even easier to get yourself paid on time.

6. Let Go of Late Paying Clients

Despite all your efforts, you’ll eventually encounter a client or two who just can’t seem to pay on time.

At some point, you’ll need to evaluate the impact of that delayed cash flow to your bottom line to determine whether the late paying client is even worth keeping on.

If your delinquent customer is not responding to your communications or offering a plan to catch up, you might need to stop work in order to catch their attention. Provide two weeks’ notice before pausing services, then if you don’t receive payment within another two weeks, it’s likely time to end the contract.

Small businesses who don’t have a solid plan in place for dealing with late payers and delinquent customers are often taken advantage of, sometimes resulting in insurmountable cash flow issues. By taking a proactive approach to your accounts receivable, you’ll significantly improve your chances of being the first vendor paid by every customer, every time.

Properly managing your accounts receivable is critical to maintaining a healthy cash flow—but at the end of the day, it’s only one side of the equation.

So while you’re shoring up your receivables, make sure you’re also keeping an eye on sound management of your accounts payable. These two sides of the cash flow equation work together to keep your business financially healthy.

Keeping An Eye On Your Credit

Why exactly does it matter how well you manage the debts owed to your business?

(And these debts owed to a business are referred to as what? That’s right—accounts receivable.)

At the end of the day, your focus is on helping your business to succeed. Proper cash flow is crucial not only to your business’s short term survival, but also to your ability to grow over the long haul—and you can’t have proper cash flow without collecting payments on time.

More specifically, the way both you personally and your business manages its debts will affect your credit rating—which is the single greatest determining factor in your ability to get funding for future business growth.

As you seek to get a better handle on your business’s accounts receivable, it’s worth your time to also learn a thing or two about your business and personal credit ratings—and how those factors get impacted by the way you manage your payables and receivables.

Your Personal Credit Score

As the owner of your business, your personal credit history will significantly impact your business’s ability to qualify for a loan—or any other form of credit. Even if your business always pays its bills on time, lenders will look into your personal credit as a measure of your ability to pay back a business loan, so it’s important to make sure that your personal credit rating is the best it can be.

If you think you’ll be in the market for a business loan sometime soon, check your credit report from all three major reporting agencies—Experian, Equifax, and TransUnion—to learn your score. All three agencies have a different format for calculating credit ratings, so it’s important to seek out information from each one individually.

Not sure how your personal credit rating stacks up? Here’s a quick breakdown:

700 and Above = Excellent Credit Rating. Best Loan Options Available

650 – 699 = Great

600 – 649 = Average

551– 599 = Below Average

550 and Under = Poor Credit Rating, Very Low Chances of Loan Approval

If your personal credit rating could use some improvement, start by monitoring your credit reports regularly for any discrepancies or irregularities in the reporting.

Make sure that you recognize all of the accounts and entries, and if you find an error, contact the reporting agency in writing to correct it. This process can often be tedious, but protecting your business’s future financing options is worth the hassle.

Beyond correcting errors, there are a few other “hacks” that could offer a quick boost to your credit score, like increasing your credit limit (without increasing your spending) or addressing dormant accounts that might be hurting your rating.

But overall, the best thing you can do to maintain a great personal credit score is to collect on your receivables so that you can make all debt payments on time, every time.

Your Business Credit Rating

If you have an Employer Identification Number (EIN), your small business also has its own trackable credit report and history. Along with your personal credit, your business credit score will significantly dictate your eligibility for future business financing.

Your business credit score is determined by five main factors—your payment history, amounts owed, your length of credit history, types of credit used, and new credit.[2]

Again, payment history is the most significant of these factors, so it’s critical that you always make debt payments on time, both personally and for your business.

Dun & Bradstreet is the reporting agency for monitoring your business credit rating. If you plan to apply for financing anytime soon, check your business credit report for accuracy at least once every 6 months. If you encounter an error, contact the agency in writing for a correction.


Now you’ve got a big answer to the question we started with: “Debts owed to a business are referred to as what?”

And as it turns out, that answer—accounts receivable—matters a whole lot when you’re running a business and trying to maintain positive cash flow.

Cash flow and accounts receivable are rarely any business owner’s favorite topic of conversation. After all, managing money is stressful! And if you don’t happen to be running an accounting firm, it can leave you feeling at least a bit out of your element.

Instead of giving into the temptation to glaze over following proper accounts receivable practices, keep your eye on the prize. It might not be glamorous—but ultimately, making sure that you take steps to make clients pay you on time is an investment in the long-term success of your business.

Article Sources:

  1. “Products Comparison Chart
  2. “What’s in My FICO Scores?
Founding Editor and VP at Fundera at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. 

Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.

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