While hoping to complete a second round of equity financing last fall, Data Drive Thru faced a cash squeeze. Needing capital to exploit rising demand for a patented high-speed data- transfer technology, CFO Brad Oldham had two viable options: increase debt or sell receivables. But a frozen credit market made traditional bank loans extremely difficult if not impossible for the company to access, and selling receivables to a traditional factor would surrender too much cash flow.
So the company turned instead to a new online exchange that does for receivables what eBay does for consumers' used merchandise: auction it off. Live since December, The Receivables Exchange is an online bidding platform that touts greater control, faster remittances, wider access to global buyers, lower transaction costs, more transparency, and less documentation than other methods. It will accommodate amounts as low as $10,000.
Unlike eBay, however, buyers don't end up taking physical possession of a product. Instead, they bid the amount they will pay for the receivables. The pricing is based on the risk of remittance. Gold-plated receivables, such as those issued by Wal-Mart, command the highest prices. Size of advance is also a factor — around 85 percent for good credits. The Receivables Exchange validates all parties.
The service's primary appeal may be to small and midsize companies holding IOUs from big companies with sterling credit. Oldham is happy with his initial experience; his first auction, in December, found a buyer willing to extend him $100,000. The next morning, Oldham had cash in hand on terms he liked. Over the course of several transactions, he has trimmed the discount rate to less than 3 percent.
One buy-side portfolio manager calls exchange-traded receivables a brand new asset class. In sharp contrast with Wall Street's fatal appetite for excessive leverage and complexity, says Bill Andersen of Andersen Capital Management, The Receivables Exchange exemplifies "the good side of financial innovation — bringing together buyers and sellers who would not have met otherwise."
Quorum Technical Services, which provides IT staff to global corporations, uses The Receivables Exchange to augment its $200,000 line of credit. Founder and CEO Jack Karamanoukian says that Quorum tallies its invoices on Fridays and posts them to the exchange on Mondays. When totals exceed the $10,000 threshold, bidding can begin. The fastest trade so far: $19,000 in 28 minutes.