The Receivables Exchange is a viable option for cash-strapped businesses

Finding a Viable Option for Cash-Strapped Businesses Jody L. Padar, CPA, MST

Times are Tough and Cash is King. Clients who used to survive waiting on receivables are finding it increasingly harder to maintain their cash flow.

Recently, I received an urgent call from one of my favorite clients –the one you like who usually listens to you or with whom you may have a disagreement, but in the end there is a mutual respect. He’s always telling me he is “just a pipefitter,” yet built an HVAC company with 20 employees that grosses more than $5 million annually. It turns out he needed $50,000 by Friday in order to pay his unions. If he’s late, penalties on late union fees can exceed 20 percent.

To compound the problem, the credit line secured by his home was recently cut off, and although he has shown a profit the last three years, no bank was willing to loan him money because his business was considered to be  in a “risky” industry based on today’s economy. Yet, he usually has at least $500,000 in accounts receivable sitting on his balance sheet.

My solution for him was to factor his receivables – not a perfect solution, but workable. Under certain conditions, factors, finance companies or other business entities may be willing to purchase a business's accounts receivables, giving the business cash for a certain percentage of the receivables up front, with the remainder (minus a fee) to follow as payment is received from the customers.In theory, it's a win/win transaction. The business gets an instant injection of cash and the factor earns a fee for its services, so when I searched online for “factor companies,” what came up was The Receivables Exchange.

Much to my surprise, while the underlying asset used, accounts receivable, is the same, the transaction itself is quite different.  What a remake on an old idea, and what an awesome technology platform! The Receivables Exchange delivers a dependable liquidity solution whose timing is impeccable in what remains an abysmal credit environment for most small and mid-sized businesses.

The Receivables Exchange connects buyers and sellers in a real-time auction marketplace to buy and sell receivables. Small- and mid-sized businesses (sellers) quickly and easily monetize their accounts receivables by posting their outstanding invoices to be bid on in real-time by a global network of accredited institutional investors (buyers). Sellers can completely control the process setting their own terms including auction length, minimum advance and maximum fee. By selling their receivables in an open, competitive marketplace, sellers improve their cash conversion cycles, gain access to competitively priced capital and reinvest that cash into growing their business.

Often likened to an “eBay of Working Capital” and covered in The Wall Street Journal, The New York Times, Forbes, CFO and Inc., the service provided by The Receivables Exchange is specifically designed to help businesses optimize their cash flow management to increase liquidity.

What I personally like about this idea is the confidentiality aspect. No one knows a third party is involved. The client directs their customer’s payments, to a JP Morgan Chase account which is swept daily. All the client’s customer knows is that payment now goes to a different bank account. This information comes from the seller, so you hide the fact that you are selling your receivables. The client is also not required to sell all of his receivables; he can pick and choose the ones he wants to sell and the frequency.

Like eBay, as you build successful transaction history on the Exchange, your discount rates begin to drop. You become a hot seller and buyers fight for your receivables, thereby driving the costs down.

In these challenging economic times, the nation’s small and mid-sized businesses continue to bear the brunt of the credit squeeze. Many turn to alternative sources of business financing, and more businesses across more industries are selling receivables to fund the growth of their business. Companies ranging from technology to manufacturing, media to construction and distribution to staffing – from $2 million to more than $500 million – embrace receivables financing as a means of improving their cash flow. The Receivables Exchange’s new online marketplace has seen nearly 200 percent quarter-over-quarter growth.

I took my client through the online approval process, and he was able to quickly start selling his receivables. More than that, he now has another financing option when faced with a cash flow crunch.

Guess who is still his favorite accountant and who is my favorite client?

About the Author: Jody L. Padar, CPA, MST, is a partner/shareholder with James J. Matousek CPA, Ltd in Mount Prospect, Ill. Ms. Padar is a Certified Public Accountant and highly sought-after speaker. She is a certified QuickBooks® Pro Advisor and is a member of the Intuit Trainer Writer network. She was recently named one of CPA Technology Advisor's Top 40 Under 40.