Finding a Viable Option for Cash-Strapped Businesses
Dec. 01, 2009
“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.
Several weeks ago, I received an urgent call from one of my favorite clients
— you know the type, the ones 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 for 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 wants
to loan him money because he is in a “risky” industry based on today’s
economy. Yet, he usually has at least $500,000 in accounts receivables sitting
on his balance sheet.
My solution for him was to factor his receivables — not a perfect solution,
but workable. Under certain conditions, factor finance companies or other business
entities may be willing to purchase a business’ 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 (www.receivablesxchange.com).
What a remake on an old idea, and what an awesome technology platform for our
horrible credit environment!
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). By selling their receivables in an open, competitive marketplace,
sellers reduce their cash conversion cycles, gain access to competitively priced
capital and reinvest that cash into growing their business.
Known as the “eBay of Working Capital” and covered in The Wall
Street Journal, The New York Times, Forbes, CFO and Inc., the service is specifically
designed to help businesses optimize their cash flow management to increase
What I personally like about this idea is the confidentiality aspect —
no one knows a third party is involved. An account with JP Morgan is opened
in the client’s name to collect payments, sweeping to the seller’s
account each day. All the client’s original customer knows is that payment
now goes to a JP Morgan bank account. This information comes from the seller,
so you hide the fact that you are selling your receivables. The customer is
also not required to sell all 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 their growth of their business. Companies ranging
from technology to manufacturing, media to construction and distribution to
staffing — from $1.5 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 greater than 300 percent quarter-over-quarter
I took my client through the online approval process, and he is now in the
process of selling his first receivable. More than that, he now has another
option when faced with a cash flow crunch.
Guess who is still his favorite accountant and who is my favorite client?
Jody L. Padar, CPA, MST, is a partner/shareholder with James J. Matousek CPA,
Ltd in Mount Prospect, Ill. Contact her at 847-255-7212 or firstname.lastname@example.org.