Part 4 The Smartest Financing Opportunity You've Never Heard of
The Receivables Exchange brings an old practice of last resort into the digital age.
When Joseph Reini walked into his bank in late 2008 looking to finance the steady growth of his engineering firm, Mason-Grey, he ran into a brick wall. Reini needed his bank to extend his credit line so he could hire more people to take on more business. But in a classic chicken-and-egg scenario, his bank wanted to see the increased revenue on the books before they would extend the line.
“Frankly, I was stunned," recalls Reini. "I kept going back at 60-day intervals, and they just kept saying, ‘No, No, No.’ It was like that David Spade Capital One commercial."
So Reini eventually turned to another option that, at this rate, may just merit its own catchy pop-culture references. It’s called The Receivables Exchange, and it’s helping take invoice factoring, the long-semi-disreputable practice of borrowing against receivables, out of the shadows and squarely into the business plans of cash-intensive businesses like Mason-Grey.
An eBay for Invoices
It works like this: The Receivables Exchange (TRE) is an online marketplace that auctions invoices to institutional investors, who buy them at a slight discount, providing the seller with an immediate source of cash. On average, companies receive funding the day after auctions close. As the companies collect the receivables, they pass them directly to the winning bidder, and that settles up the debt.
TRE describes itself as an eBay for invoices and the cost structure isn’t far off. Most of the site’s 1,000 sellers get between 98 and 99 cents on the dollar, and pay a per-auction fee of 30 to 70 basis points (0.3-0.7%), depending on volume and their TRE track record. Reini says he now simply figures his TRE cost into the price he charges for each new project he takes on. The result: more control over cash flow and more growth.
Unlike with factoring, which has long been a fixture of the rag trade, TRE doesn’t require a personal guarantee or a broader lien on the business. It does require sellers to buy back invoices that default. That gives companies an incentive to post only their surest receivables, which attracts more, and better-quality, bidders.
Still, sellers get to choose the invoices they auction, and need participate only as often as they want — a level of flexibility not available in factoring. Sellers decide what they’re willing to accept, and the auction format drives down the discount. Reini adds that he’s never had an auction not meet his minimum bid.
But the biggest advantage of TRE might be that the transactions are anonymous and several steps removed from a company’s customers. Invoice payments go to an electronic lockbox, and Mason-Grey’s clients never have contact with or would even know (if not for articles like this) that their payments were going straight to a lender.
“There seems to be a heavy-handed nature to a lot of factoring,” says Reini. “We didn’t want some ominous-sounding ABC Credit Corp. picking up the phone and calling our clients.”
More About TRE:
· Avg auction size: $52,000
· Number of Sellers: 750
· A/R inventory: $12 billion
· Buyer liquidity: $20 billion
· Sellers in 48 States
· Sellers in 45 industries
· Repeat sellers: 83%
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Eric Hagerman is a New York-based freelance writer and editor and former senior editor at Popular Science and Outside magazines.
