The Economist: Forget debt. Here’s the most dangerous corner of every balance sheet

Key topics:Receivables hide financial stress and can fuel corporate fraud.Financing receivables has grown into a $4trn global industry.China’s local-government receivables pose a major economic risk..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..From The Economist, published under licence. The original article can be found on www.economist.com© 2025 The Economist Newspaper Limited. All rights reserved..The Economist.Debt suffers from a bad reputation. In almost every culture, lending and borrowing are maligned, with unflattering idioms common. Yet credit is the lifeblood of capitalism: the ability to lend and borrow facilitates hundreds of billions of dollars of activity every day.Those looking for a balance-sheet item to gripe about could be a little more inventive. An even less sexy budget line has played an understated role in many financial blow-ups. Receivables, a category of assets that represents the money a firm is owed by its customers but has not yet received, come up again and again, along with the practice of borrowing and lending against future payments. Most recently, a committee appointed by First Brands, an American car-parts firm which filed for bankruptcy on September 28th, said it would investigate if the company’s receivables were borrowed against several times over. Although the firm may turn out to have kept to the rules, plenty of others have not.In their most mundane form, receivables record a simple form of credit. A clothing manufacturer might supply a new line of coats to a retailer without taking payment right away. At an agreed point down the line, the retailer will begin to pay the manufacturer for the stock. In the meantime, the manufacturer records the transaction as a receivable, allowing it to book the revenue..Read more:.China unveils major stimulus package to revive slowing economy.Rising receivables can disguise a business model under strain, however. Carillion, a building firm, collapsed in 2018, becoming Britain’s largest-ever liquidation. Hedge funds had short-sold its stock after noticing accounts receivable were climbing faster than revenues.On other occasions, receivables are used for brazen fraud. Sunbeam, an American consumer-products firm, restated its results in 1998 after it was found to have inflated its revenue with sales it had not made yet, which were booked as accounts receivable. Satyam Computer Services, an Indian IT company, produced reams of fake invoices, designed to generate receivables and bolster tales of rapid expansion. When Enron, an energy-and-trading giant, crumbled in 2001, its receivables position proved to be illusory.Receivables are difficult for auditors to scrutinise. Companies have lots of clients. Even when they are legitimate, it is hard to tell how much cash will eventually arrive from them. Shady practices such as “channel stuffing”, which involves sending customers more product than they have ordered and temporarily recognising the additional revenue, require a forensic eye to spot. Barry Minkow, a businessman jailed twice for fraud, was at least honest: “Accounts receivable are a wonderful thing. They are a tool that is used by a fraudster like me, to ask to borrow money mainly, and to show earnings.”A modern industry has emerged around the financing of receivables, adding to the potential for problems. Factoring, in which a supplier sells its receivables to another party at a discount to get hold of cash more quickly, has grown fast. According to FCI, a trade body, the field had a turnover of $4trn last year, up from just over $2trn in 2010.Dan Davies, author of “Lying for Money”, a book about fraud, notes that the cost of digging into the creditworthiness of a given company’s receivables can ruin the economics of lending money in such a manner, as margins are often thin. Some forms of credit, such as that secured against regular transactions, are among the most reliable in corporate lending, and thus offer modest returns. Others are riskier and mean borrowers must cough up to entice lenders. Debt linked to First Brands offered double-digit yields, a punchy return.China’s local-government-financing vehicles, through which the country’s astounding infrastructure boom has been funded, might be the source of the next receivables blow-up. According to data collected by Goldman Sachs, a bank, the receivables of LGFVs for which financial information is available ran to 22.7trn yuan last year, equivalent to $3.2trn or 17% of China’s GDP, up from 13% in 2018. That is bad enough. Worse still, money is largely owed to the LGFVs by local governments themselves, many in perilous financial positions.Much like debt, receivables are a vital part of economic life. They keep goods flowing and balance-sheets in shape. Most are as dull as dishwater. But with limited visibility, they can be explosive—as has been repeatedly demonstrated. Moreover, the increasingly complex mechanics of the industry mean more blow-ups to come. Good luck spotting them in advance.