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The Receivables Exchange, which bill themselves as the world’s first electronic marketplace for trading accounts receivable, simply put, allows businesses to sell their receivables to a global network of institutional investors through an auction (with an eBay-like “buy it now” option) and access working capital in as little as one (1) day. The model, which has been covered by a large number of leading publications (including BusinessWeek, Forbes, and Inc.) is very successful with 99% of all auctions completing and more than 90% closing through the buy-out option, sometimes in as little as thirty seconds!
So why should you care as a Procurement Professional?
In these troubled times, it’s your job to do everything you can to save the business money … and helping finance, who are probably just going to the local bank and accepting the (higher) rates offered on operating credit lines, save money on working capital counts. If you need 2,000,0000 of working capital for the next 30 days while waiting for payments to come in and you take a loan at 2.5% when you could sell your receivables (as an asset-based sale) at 1.5%, that’s 20,000 in financing payments you don’t need to be making. If you have to do it every month, that’s 240,000 of instant savings. And we all know that the financing terms can be much more onerous than just 2.5% for many small and mid-sized companies today, meaning that this can be a million dollar plus savings opportunity for many mid-sized businesses.
Not only can you point out this solution to your finance team, which is probably spending 2.7% of working capital unnecessarily on an annual basis, but you can use your procurement and customer expertise to let them know which receivables would be the most attractive to third party financiers and which receivables would command the best rates. This would go a long way to helping traditional finance managers, that probably see you as the “L” in “P&L” (as astutely noted by Mr. Guth on the VMO blog), understand the cost-savings potential of your department when your expertise is applied throughout the organization.
Furthermore, it’s also your job to keep tabs on the financial health of your suppliers and help your strategic suppliers out so that they are there to help you in the future. If you know that they are in need of more working capital, and you’re not in a position to pay them early (at a fair discount), you can point them to The Receivables Exchange and even help them with the on-boarding and due-diligence process.
So how does The Receivables Exchange work?
Unlike traditional factoring, which generally costs more and places much more onerous restrictions on your financing, The Receivables Exchange is completely anonymous, your customers are not notified that your receivables have been sold (unless you want them to be notified — which means there is no impact to a customer’s AP department) with a 100% transparent fee structure, that is free from restrictive covenants. You bundle one or more invoices for auction, define the minimum advance you require and the maximum transaction fee you’ll pay (for a 30 day advance), your optimal “buy it now” financing requirements, the auction start time (usually “now”), and the auction length (3+ days). Then 30+ buying organizations, which represent 15 Billion in A/R buying power, bid on your receivables and, if the requirements are reasonable, a few days later (1-10 depending on how long the auction takes to close and transfer time requirements), you have cash in your bank account. Then, when your customer pays your invoice(s), the advance, along with the lending fee, is paid to the buyer, a small transaction fee (that is typically between 30 and 60 basis points and determined by your z-score) is retained by The Receivables Exchange, and the remaining funds go into your bank account.
And it’s a sellers market right now. The exchange currently has buying power that is four times it’s current throughput with a number of Receivables Buyers still waiting in the wings to take advantage of the great supply chain financing opportunities that are being passed up by banks and other traditional lenders. The only downside is that the platform is currently limited to US-Headquartered sellers. You can list international receivables on the exchange, including receivables due to international units, but you currently have to be operating, and headquartered, in the US to take advantage of the exchange. When you consider that you can significantly decrease DSO at a very low cost of capital, compress CCC, and increase ROE in a matter of minutes once you are registered (as the auction environment has been optimized for the sale of receivables and the process of uploading your invoice and due diligence documents, bundling for auction, and defining your minimum and optimal terms has been streamlined to only take a few minutes, on average) and download their Adobe Air client, it presents a great opportunity for any company that needs to improve their working capital situation.
For additional information, you can contact Paul Hoeper (firstname.lastname@example.org) directly.