Bank lending has not yet recovered to pre-crisis levels—nor is it likely to in the Basel III environment. So companies are looking both to explore new sources of funding and reduce their funding needs by concentrating liquidity in-house.
Trade receivables are one corporate asset that can be used to achieve results on both counts and accordingly, companies are increasingly examining opportunities in this area. By improving collections procedures and introducing techniques such as differentiating among creditors according to their risk profile, companies can make significant improvements to their days sales outstanding (DSO). Meanwhile, a range of receivables financing techniques is available to companies looking to improve working capital by monetizing receivables.
Alongside more traditional receivables financing techniques like factoring and securitization, some recent innovations are beginning to reshape this area. Non-bank supply chain finance providers are starting to gain market share with platforms that offer greater flexibility than their bank counterparts. Like the bank programs, these non-bank providers enable corporations to offer supply chain finance to their suppliers.
A notable newcomer to the market that targets the suppliers themselves is the Receivables Exchange, which was launched in 2008 and has been dubbed “eBay for receivables.” Rather than participating in a structured financing program, companies use the platform (sellers) to auction their receivables on an electronic marketplace to institutional investors (buyers). So how does this work, and is it a viable option for corporations looking to improve their working capital?
For companies interested in selling their receivables via the platform, the process is straightforward. After registering, which typically takes one to two weeks, companies select the invoice or invoices that they want to sell, set a minimum advance and maximum discount fee, put the invoice on the platform and go live. All buyers are notified of the auction simultaneously and the bidding process begins.
“Bidders can bid on as little as 1% of the auction, or the entire auction,” says Nic Perkin, president and co-founder of the Receivables Exchange. “Typically there will be four or five bidders on any given auction, and typically the auction will close within 24 hours, at which point the funds are awarded to the seller. That money flows through the platform electronically from buyer to seller.” According to Perkin, less than 1% of auctions attract no bids.
So which companies can use the platform? Any from small and midsize companies with a minimum turnover of $2 million to Fortune 500 companies, says Perkin. Sellers must be registered to do business in the U.S. and must have at least two years’ operating history. The minimum auction value is $10,000 and receivables must have a maximum term of 90 days. Companies can use the platform as often or as little as they wish.
Perkin describes the platform as “the next evolution” of supply chain finance. While there are some similarities between the receivables auction and supply chain finance, the differences are striking. For one thing, the corporate customer initiates supply chain finance and offers it to its suppliers, while suppliers use the Receivables Exchange without the involvement or knowledge of their corporate customers.
In comparison with traditional bank supply chain finance programs, the Receivables Exchange is characterized by its flexibility. Companies can auction invoices from different customers, although they typically sell those relating to their best customers, i.e., the most creditworthy. Companies auctioning receivables build up a track record that over time can lead to a significant reduction in their cost of funds of as much as 50% to 60%, according to Perkin. On average, sellers are able to lower their cost of capital by 30%.
The Receivables Exchange currently has more than 1,700 registered sellers and about 100 institutional buyers, and is on track to handle $1 billion of receivables this year.
This approach will not be suitable for every company, however. While the Receivables Exchange provides services to the largest corporations, in practice transaction size limits and other factors make this a solution more likely to be used by small and midsize companies, says Enrico Camerinelli, a senior analyst at Aite Group. “The size of what can be borrowed cannot be comparable to what a corporate can get from a bank or from syndicated supply chain finance coming from a number of banks,” Camerinelli says.
Small and midsize companies “might be looking at this with interest, but this is a market that is precluded to big corporates because of the need to maintain relationships with banks, where supply chain finance programs can be an important element,” he adds.
As the supply chain finance market continues to mature, the options open to corporations and their suppliers are steadily growing. Auctioning receivables might not be suitable for everyone, but it’s an interesting development at a time when companies are more focused than ever on optimizing their working capital and reducing their funding needs.
For more about supply chain finance, see A Lifeline for Suppliers.