Get Working Capital at Competitive Rates - Accounts Receivable Financing at The Receivables Exchange

Out of Crisis Comes Opportunity David Kirkup, CFO and partner for B2B CFO®

The Year 2009 rolls on leaving in its wake the worst credit crisis in recent history and continued economic uncertainty for small business owners.  The outlook has never been more difficult to forecast. Vital operations decisions about which expenses to cut, whether sales projections will be met and how to fund gaps in liquidity are all becoming increasingly difficult.  If you listened to the news networks, you might be inclined to think that the breakdown in the credit markets is only impacting the large financial services firms.  What we’re not hearing about are the small businesses who are feeling the greater pain.  As a B2B CFO® since 2004, it is my fiduciary responsibility to identify in advance when it is time to make essential changes to key business processes in order to maintain our competitive edge financially.  Innovative ways to raise capital are paramount for success in any economy, but especially so in a downturn.  Accounts receivable management is one of those areas that is prime for innovation.

In the past, for small and mid-market companies, credit has been relatively easy to come by as banks aggressively pursued entrepreneurs, offering larger loans at cheap rates to untested companies.  Now, nervous about the prospect of more borrowers defaulting on loans, banks have been tightening their rules when it comes to lending money.  Banks have toughened lending standards and raised interest rates on loans to small businesses.  And industry experts say lending jitters are expected to continue, making it harder for small business to gain access to working capital.

Cash is your most important asset and can represent the silver lining in sustainability and opportunity during business downturns.  So, it's a good time to tighten up your accounts receivable policies as one way to generate more cash.  There are several good reasons for this. 

For one, accounts receivable (AR) are probably your single largest source and use of cash.  They are a source when your customer pays, but they tie up precious cash until that happy payday moment - which is why rapidly increasing sales can sometimes deal a corporate deathblow.  Sound policies ensure that your cash cycle - the time for your sales to generate cash to pay your vendors - is minimized.

Cleaning up your AR process also pays other dividends.  Your company is only as strong and valuable as your financial infrastructure.  If the structure is weak, then you have serious business risks, and the value that outsiders will place on your company is impaired.  In addition, when you need to raise additional financing - your AR are likely a key source of collateral. 

Having well-documented and efficient AR procedures will expedite the process of selling individual receivables, or negotiating a collateralized bank loan.  Here's a checklist:

1. Establish written credit policies - state expected days for collection, and what actions need to be taken   when a customer is late.  Don't wait.

2. Identify a "Credit Manager" who will make credit and collection decisions and take prompt action on   delinquent customers. 

3. Print regular Aging reports and use them.  Make notes on follow up.  Be aggressive.  Have weekly meetings   with your Credit Manager and review the status of open accounts.

4. Have all customers complete a Credit Application.  Company fortunes are changing fast, so stay on top of   this.  Get personal guarantees.
 
5. Use Dunn & Bradstreet to get current customer info before shipping.  Have D&B flag material changes in   customer fortunes.

6. Mail invoices on service date and specify the due date, or customers will pay from receipt.

7. Use email billing and payment by credit card to minimize outstanding invoices.

8. Mail statements monthly - it shows how much is owed, and helps keep AR correct.  It's also good for   developing internal control for your business.

9. Have a Collection Agency on speed dial.  Don't wait to use them.

10. Make AR management a priority, and be a squeaky wheel.   Many companies are juggling cash flow right now -  make sure you stay at the top of their list.  Many times, customers will delay payments to other vendors or  suppliers if they are low on cash to avert receiving a collection call from you.  A well run company knows  the importance of their accounts receivable in good times and bad. 

Funding sources will tend to favor companies that have their financial houses in order, that produce reliable and accurate financial statements, and that can demonstrate a deep understanding of their business model.  So, where do you turn if the bank won't help?  With traditional finances unavailable, many businesses have turned to alternative sources of funding.  Many are turning to receivables finance.  Companies are learning to uncover value by turning their accounts receivable into cash in order to close the liquidity gap.

A more flexible approach to funding, receivables financing depends more on the customer’s credit than your own.  While there are various ways to do this, The Receivables Exchange is the first to bring receivables finance into an open and transparent marketplace that has the potential to make it a mainstream small business financing tool for companies seeking to increase their short-term liquidity.  As the name might suggest, this is a site that allows a small businesses to sell their receivables by having Buyers compete in an online auction marketplace to purchase their receivables.  Accredited institutional investors bid on them and, if they meet the terms set by the Seller, the best bid wins.  This is an intriguing concept because the Exchange is opening up the global liquidity marketplace to small companies.  A company can sell individual or multiple receivables and get multiple bids to ensure they are getting the best price.  Once registered with the Exchange it can take just 24 hours to get much-needed capital.

The Receivables Exchange is a perfect example of a game-changing product, plugging small and medium companies requiring working capital into the global financial system and pairing them with cash-rich institutional investors from around the world.

About the Author: David Kirkup is a CFO and partner for B2B CFO®.  David has 25 years of accounting, insurance, IT and general business experience.  He has served as divisional CFO or controller at a number of large corporations: including Reuters, Marsh & McClennan, Zurich Insurance and ADP.  As CFO with a national PEO firm he has dealt with the credit and financial issues facing hundreds of small business clients.