Lien on Me

CFOs eager to fill financing and liquidity gaps are turning to receivables for leverage.

Going Once, Going Twice

For companies that want fast cash and maximum flexibility, auctioning off receivables in an electronic marketplace is another solution. The Receivables Exchange is an online bidding platform that offers faster remittances and access to pools of cash, such as hedge funds and other private money. The seller of the receivables posts invoices or groups of invoices online and describes the terms it wants — the advance rate as well as a cost of funds. Anonymous buyers then bid on them, and the seller receives its money within 24 hours of the invoice being bought.

Joe Reini, president of integrated-controls and IT-services firm Mason-Grey, posts about $25,000 of outstanding invoices per week on The Receivables Exchange. Invoices can be sold in minutes, and in the eight months Reini has used the exchange he has lowered the financing cost from 2% of the invoice to 1.5% (based on a 30-day term) and pushed the advance rate from 85% to 88%.

“The payment history of our customers gives confidence to buyers, and receivables of Fortune 500 companies are very well received,” Reini says. “New employees go to work on Day 1 and by Day 5 we have our first invoice printed. In a typical situation, we wouldn’t get paid for another 45 days. With the Exchange, I can load an invoice Monday morning and have the cash by Tuesday. “

Of course, the seller on The Receivables Exchange is not building a relationship with capital providers, which is a drawback if a portfolio’s quality goes south. And the cost of the funds may be fairly high when considered on an annual basis, although Reini says that for his firm the cost is small as a percentage of gross margin.

All forms of receivables financing come with headaches — lenders wanting to send verifications of transactions to customers, negotiations about the lender having “full dominion” over cash flows, and the inability, for the most part, of the borrower to independently grant customers looser terms. But for companies snubbed by traditional banks, it’s filling a crucial financing gap. “It has worked masterfully,” Reini says. “We’re growing when banks aren’t trying to do a thing on our behalf.”

Vincent Ryan is senior editor for capital markets at CFO.

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