Receivables Exchange Turns SMB Receivables into Cash Flow

Many economists believe that small businesses are the key to economic recovery, but as SMBs shift into growth mode, the question becomes where will they find the capital to fund that growth? Justin Brownhill and Nicolas Perkin, co-founders of The Receivables Exhange, believe the answer lies in an underutilized asset on most small businesses’ balance sheets: accounts receivable.

“Traditional business finance mechanisms are cash flow-focused solutions and have minimum cash flow requirements that most SMBs can’t meet,” Perkin said. “We realized that an asset-based solution would make more sense, and the question became which asset would make the most sense.”

According to the Federal Reserve Board, the Receivables Outstanding item on SMBs’ balance sheets is collectively worth $17 trillion in the U.S. But Perkin noted that the market for receivables was highly fragmented, making it difficult for small businesses to capitalize on this asset.

“There was no information share, such as factor-to-factor or bank-to-bank,” he said. “And for many small businesses, the constraints and cost of capital were more than their business could handle. Furthermore, there was no easy way for SMBs to benefit from responsible use of those solutions over time.”

Creating Small Business Cash Flow

Enter The Receivables Exchange, a competitive electronic marketplace that allows small businesses to auction off individual receivables to buyers — accredited institutional investors like commercial banks, hedge funds, asset-based lenders and factors — converting an illiquid asset on the balance sheet into cash that small business owners can immediately invest into fueling growth.

“The Receivables Exchange was founded on the fundamental belief that small and mid-sized businesses should have unfettered access to affordable capital,” said Laurie Azzano, senior vice president of marketing at The Receivables Exchange. “What we see is that SMBs do not get their fair share of the working capital pie.”

Solid Ink Blocks

Since the recession, she noted, more than 75 percent of SMBs have seen their bank lines canceled or restricted. More than 300 banks have closed their doors since 2008, and during the same period bank lending has undergone its largest drop since the Great Depression, she said.

“What we saw in 2009 and 2010 was not just a blip,” she said. “Unfortunately, the banking landscape has changed and most would agree that it’s changed for good. This is a new credit reality. Credit remains scarce, and it’s not likely to improve.”

That’s especially problematic as small businesses gear up for growth, Azzano explained, because nearly 75 percent of small businesses expect their growth to come from the cash-intensive process of adding new customers.

Without ready access to bank lines, many small businesses are instead focusing on reducing their Days Sales Outstanding (DSO), the number of days it takes to collect revenue after a sale has been made, to increase their liquidity. Azzano said small business DSOs are now as much as 60 days.

She noted that 58 percent of small businesses sell to companies larger than they are, and large companies are focused on increasing their Days Payable Outstanding (DPO), the number of days it takes to pay its trade creditors. This tug-of-war between small business DSO and large business DPO ties up much of small businesses’ working capital.

An Alternative to Traditional Credit Lines

Azzano said The Receivables Exchange, in most cases, gives sellers .99 cents on the dollar on their invoices and reduces their DSO to two days. “It’s really perfect for small businesses that have larger customers, and particularly small businesses that are getting squeezed by extended terms,” Azzano said.

She explained that one of the upsides for small businesses using their receivables in this manner is that buyers evaluate them based on the credit history and name of their debtors. “If you’re a small business and your customer is Wal-Mart, everyone knows Wal-Mart takes a lot of time to pay, but they always pay,” Azzano said.

“We find it works great for businesses that are trying to protect against extended payment terms and that have really high-quality accounts receivable,” she added. “Companies do best when they leverage the credit quality of their largest customers.”

To sell their receivables on the exchange, small businesses must have two years of operational history, be registered to do business in the U.S. and have at least $2 million in annual revenue. If they meet those minimum eligibility requirements, they must simply complete an online application and pay a one-time registration fee.

The Receivables Exchange then performs due diligence on each applicant: lien and bankruptcy searches, verification of submitted fiscal-year-end and year-to-date financials, tax returns, bank statements, etc.

Once they’ve been approved, sellers log in and create a profile that indicates their auction posting preferences and set auction terms and bidding parameters like auction length, minimum advance amount and maximum discount fee. The sellers also create account debtor profiles of their customers with outstanding invoices for validation, and they may then post one or more receivables for auction. Sellers can even set a buyout price.

The Receivables Exchange also validates its buyers, who must be accredited institutional investors with a minimum of $5 million in assets under management.

Azzano explained that once the auction closes, the buyer wires the proceeds to the seller’s business account the next business day. The Receivables Exchange then serves as an intermediary: When the account debtor pays the seller’s receivable, The Receivables Exchange remits the amount due to the buyer and remits any remaining amount back to the seller. The Receivables Exchange takes a transaction-based fee for its payment.

Azzano added that sellers can post auctions as often as they like. The minimum auction amount is $10,000, but she noted that amount could be composed of multiple invoices. Auctions can go as high as millions of dollars at a time, she said, noting that the current average auction size is a little less than $60,000.

Most receivables are sold at the buyout rate posted by the seller, she said, and the average duration of an auction is about 24 hours. The Receivables Exchange currently boasts 1,450 sellers and about 100 buyers, Azzano said.

Thor Olavsrud is a contributor to and a former senior editor at He covers operating systems, standards and security, among other technologies.

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