Editor's Note: Learn from a panel of experts and entrepreneurs who have successfully financed their own ventures and are helping others do it at the Thought Leaders Live 2013 event May 29, in Long Beach, Calif. Event and ticket information can be found here.
In a distressed capital market, every asset can be a path to alternative financing--even your company's receivables. That's the notion behind The Receivables Exchange: The New Orleans firm allows companies with at least $2 million in revenue to offer their accounts receivable for sale in an auction format to prospective buyers.
Here's how it works: Sellers and buyers apply and pay a $500 onetime registration fee. Once approved, sellers can offer individual or bundled invoices for sale in an auction format, setting the price they wish for the receivables. Buyers can bid on invoices, usually paying .5 percent to 3.5 percent less than the face value of the receivables. Buyers can purchase part or all of an auction, which can consist of several invoices.
A typical auction is set for three days, but most close within 24 hours because the seller's terms have been met. At press time, the average auction totaled $52,000, with an average of six invoices per bundle.
"When a small or medium company goes to a financial institution and says, 'Please finance me,' they say, 'Alright. We're taking all of your receivables, and we're putting an asset lien on you, and we require a personal guarantee.' These are the things we don't do," says Receivables Exchange co-founder and president Nicolas R. Perkin.
David Rudofsky, founder of Rudofsky Associates, a business financial and strategic planning consultancy in Sleepy Hollow, N.Y., says this is a smart way for qualified businesses to "get the money they need quickly and without giving up equity."
Sellers typically get their money within 24 hours to 48 hours of the auction start. Sellers have an incentive to trade invoices from reliable payers because the money is returned to the buyer when an invoice isn't paid.
Receivables Exchange does not disclose revenue, but its 2010 year-to-date growth was between 300 percent and 400 percent as of December, according to Perkin.
The logistics are the only areas of concern, Rudofsky says. First, sellers must direct their customers to remit payments to a new address but still made payable to the seller's business.
Receivables Exchange receives and processes the payment to the buyer. If the payment is received late, the buyer is due a premium for the additional time his or her money is invested.
Rudofsky says customers might question the new address or forget to change their records, which would delay the process until the payment is redirected. However, he adds that these are minor concerns.
"I've seen instances where a company gets into a relationship with factor- or asset-based line bearers and loses control over the relationship," he says.
Receivables Exchange "gives the CFO better control over the relationship and allows the company to choose which receivables it wants to sell and which it will collect itself."