Early last winter, Joe Reini had an experience that’s become more and more common among small business owners. Reini, president and founder of 15-employee Mason/Grey, an IT systems integration firm, approached the bank he’d worked with for the seven years he’d been in business for a line of credit to help with payroll—and got turned down.
What to do? Not long after, while chatting over a breakfast meeting near Reini’s Atlanta offices, his insurance broker made a suggestion. Reini should look into The Receivables Exchange (TRE), an up-and-coming online auction site based in New Orleans with an unusual service: giving small and medium-sized businesses a way to sell their receivables quickly, easily, and anonymously to the highest bidder.
Reini investigated the site and, in May, decided to get his feet wet with a small pilot. Now, he participates in an auction every week, picking and choosing which receivables to sell and usually getting the money, sent to him via TRE, by the next day. It’s meant the difference between staying put and growing, according to Reini, who is following through on plans to move the company away from project work to service contracts providing more predictable income. He expects fourth quarter revenues to rise by 20% to 25% and to double in size by next year. “Growing in this market would have been impossible without this,” he says.
Receivables financing, or factoring, through which a company buys receivables from a client, advancing them the money and charging a hefty fee, isn’t anything new. (For more about factoring, read Anita Campbell’s article). But, while TRE’s service is like factoring, it also offers significant differences. And, as such, it appeals to a potentially larger population of small businesses. “We’ve broadened the ability to use receivables financing to companies who would have never used factoring under other circumstances,” says Laurie Azzano, TRE’s senior vice president for marketing. In fact, Reini hadn’t even considered turning to a factor before this.
Why? With TRE, Reini selects invoices from only the best, most reliable customers—those he knows won’t have trouble paying—instead of handing over the whole ball of wax, as he would have to do with a traditional factor. Also, because there’s a bidding process, he can get better terms than he would otherwise. According to Azzano, rates generally are from .5% to 3% compared to the 3% to 15% typical of most factors. Reini also decides on the length of the bidding process and sets a reserve price below which bidding can’t go. And TRE transfers the money to him from the seller in 24 hours. Since many of his receivables are “millions of dollars”, he says, that’s a big boost to cash flow.
There’s also an anonymity you don’t get with a factor. Buyers and sellers, who generally are such institutional investors as commercial banks, hedge funds, and even traditional factors, are unaware of each others’ identities. But probably more important for small businesses, clients never know that the company is using the system, because payment goes to a lock box at a bank in the seller’s name. That’s a big plus, since many firms are reluctant to inform customers they have to turn to a factor for help.
TRE, which gets a small commission from each sale for its efforts, takes care of all the due diligence for both sellers and buyers. Companies upload their financial statements and TRE then spends several weeks checking into such areas as credit rating and history of unpaid debts. That’s also a plus for small businesses. “Historically, finding a factor has been a tedious process involving talking to many potential finance partners and then negotiating to get the best rate—a very inefficient process,” says Ken Gaebler, a small business consultant with Gaebler Ventures in Chicago. “This approach alleviates those headaches.”
Still, TRE might not be for everyone. Most important, companies that don’t have invoices of a quality likely to attract interest from bidders, might not find the site useful. Many of Reini’s clients, for example, are Fortune 500 companies. “If you don’t have the right type of receivable, no one’s going to be too excited,” says Joe Abraham, founder of En Corpus, a small business consulting firm in Hoffman Estates, Ill. “But, for everyone else, this site is a no-brainer.”
Image Credit: avenueslimited
