I recently heard about a company called The Receivables Exchange. The company hosts an online real-time auction of accounts receivable and invites businesses to sell outstanding invoices to raise money quickly. The auctions enable businesses to sell their receivables to bidders in the global institutional investor market. Sellers are paid the auction value of the receivables and thus gain access to working capital.
According to The Receivables Exchange, typical sellers have more than 60% of their working capital tied up in accounts receivable and are therefore limited in their ability to take advantage of important opportunities or otherwise expand their businesses.
Collecting receivables has become an adventure for many business owners and Freelancers, as we all know. Customers may be asking for extended payment terms. Big corporations that can well afford to pay on time have sometimes adopted the mean-spirited practice of paying their small business vendors in 45-60 days, or even longer. This can put businesses in an ugly cash flow bind.
The Exchange can make available badly needed capital to (certain) businesses that cannot obtain traditional financing or cannot wait out a credit approval process. The Receivables Exchange can give access to a quick infusion of cash when it’s needed most. The process is similar to factoring, that old-school trick used to raise cash fast.
In factoring, receivables are sold to a financial institution at a pay-out rate that is usually between 75-80% of face value. The 20-25% held back is called the reserve. The quality of receivables determines the reserve amount, as does the historical average turn-around time of invoices. In other words, if big companies like Verizon or CVS are the receivable accounts and they tend to pay within 30 days, the reserve percentage will be lower.
Cash is usually sent in 5-10 days. There is no credit check. Once the receivables are paid up, the business owner is paid back the reserve, minus a factor fee of 2-5%. Additionally, there is a fee of 1/8 to 1/15 % assessed for every day past 30 days that the receivable is outstanding. It’s a heavy hit to take, but money is quickly raised and with few questions asked. Moreover, the factoring company assumes the risk of customer default.
When evaluating whether or not factoring makes sense for your business cash flow challenge, do your homework. Ask your accountant for a recommendation and then check references. Make sure you understand those numerous fees. Liquid Capital liquidcapital.com is a well known factoring company. You might also visit the websites of the Commercial Finance Association or the International Factoring Association.
But now there is a marketplace where receivables are sold to the highest bidder. As a result, it is often possible to obtain more favorable rates than factoring. This option is not available to everyone, however. To be eligible for membership, the business must have minimum annual sales of $2 million, must have operated for at least 2 years, must be registered to do business in the US and can have no tax liens. The app. fee is $500.00. Sign up online to become either buyer or seller receivablesxchange.com.
The Exchange is no scam. In January, Bain Capital gave the New Orleans based company $17 million in financing. In our credit challenged business environment, there is plenty of upside potential for the company.
Thanks for reading,
Kim
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