Looking for stable, short-term investments, banks are starting to purchase corporate accounts receivable from small businesses through an online auction site called the Receivables Exchange.
Buyers typically buy the debt for less than its face value and make a profit on the investment when the notes are fully paid.
For sellers, the Receivables Exchange offers faster access to working capital, which is often critical for small businesses that have much of their cash tied up in receivables. There's a certain irony in this, since the site was founded in part to help generate cash flow for small businesses that had trouble landing bank loans during the credit crunch.
Observers say the site's screening process offers built-in vetting of sellers, which is appealing to banks whose default rates for small-business loans surged during the financial crisis.
And bankers say that corporate receivables, which typically are paid within a few months, offer another key advantage over traditional loans — liquidity.
"What we hear from the banks, and from the buyers in general, is it's really about having access to an asset class that they would not otherwise have access to," said Laurie Azzano, a senior vice president and head of marketing for Receivables Exchange LLC, the New Orleans company that runs the site.
The service went live in November of 2008 and now has about 65 buyers. There are more than 1,000 businesses that sell their debt through the site, and new ones join daily, said Nicolas Perkin, president and co-founder of Receivables Exchange.
Azzano said most buyers are hedge funds, alternative lenders and wealth managers; only a small number are banks, she said.
However, the company is "seeing a definite increase from banks as we gain more traction in the marketplace, due to their interest in risk-adjusted, short-term investments," Azzano said by e-mail.
"At the end of the day, we're an exchange," Perkin said. "We're essentially agnostic from the standpoint of who's buying the commercial receivables."
Both buyers and sellers are vetted by the Receivables Exchange before they can use the service. First NBC Bank in New Orleans is in the process of registering as a buyer. Ashton Ryan Jr., its president and chief executive, said he sees the site as an investment vehicle that could provide strong returns without a long-term commitment.
"When you grow, you have to stay pretty short with your investments," Ryan said. "You always are booking new loans, so if you go out and buy a five- or 10-year investment," there is little flexibility to recoup funds if you suddenly need them.
"The reality is we need the liquidity, so we have to make that our primary goal for our investment portfolio," he added.
The $1.06 billion-asset First NBC plans to buy up to $10 million worth of receivables from 10 to 12 different entities once it becomes registered, Ryan said.
More than 80% of the receivables that companies sell on the site reflect "investment-grade" customers and half are S&P 500 firms, according to a report released in March by Morgan Stanley.
"We're talking about selling companies that have quality invoices," Perkin said, adding that buyers have access to in-depth information about the receivables on which they bid, including the identities of both the sellers and their customers, detailed financial data about the seller, copies of the invoices, and payment histories for the customers.
For buyers, a key benefit of a tool like the Receivables Exchange is risk mitigation, said Nancy Atkinson, a senior analyst with the Boston research firm Aite Group LLC.
"There's some vetting of the seller before they are even allowed to put their receivables up there," she said.
The eBay Inc.-style website lets business owners sell specific receivables to the highest bidder. Like the online auction giant, it has a Buy It Now feature allowing bidders to buy the receivable at a price set by the seller.
The exchange is similar to factoring, a popular financing format that also lets business sell their receivables, but Azzano said there are some key differences.
Most factoring deals require sellers to pledge all their receivables as collateral, Azzano said. "That's not the case here. You can choose to post one receivable. You can choose to post multiple receivables. You can choose to post all of your receivables."
Additionally, with factoring the buyers typically handle the collection of payment from a business' client, she said. "Here the seller maintains the relationship."
Sellers must have been in business for two years and generate at least $2 million in annual revenue to join. The also must submit tax returns, and other financial information.
The exchange only allows the sale of commercial receivables, not consumer accounts. Sellers can auction off individual receivables or bundle several together at a time depending on their capital needs.
"They look at their shelf of inventory receivables, they pick which ones they want to sell, and they set the price for it," Perkin said.
To become a buyer, investors must meet the Securities and Exchange Commission's accredited institutional investor criteria, which require them to have assets of at least $5 million, Azzano said.
The exchange also performs background checks on buyers to screen for unscrupulous behavior.
"We've definitely turned away buyers who have not qualified, not to say they were definitively bad operators," Perkin said. "We err on the side of conservatism."
If a bidder wins an auction, it is actually buying the receivable or receivables outright.
"We are not a loan; we are a true sale of the asset," Perkin said.
Sellers and buyers must pay a one-time fee of $500 to register and transaction fees for each auction; buyers must also pay closing fees.
For sellers, the exchange can help free up cash flow.
Ramard Inc., an Ocala, Fla., developer of animal-health products, joined the exchange last year hoping to free up cash needed to develop new products. "The difficult part for us from a cash flow standpoint is trying to get these products developed and manufactured ahead of any sales activity," said Ramard's president, David Menard.
The typical pay cycle "is running 45 to 60 days," he said. "We're certainly looking for improved cash flow."
Both Ramard and Visual Evidence/E-Discovery LLC, a Cleveland company that makes charts, presentations and other documents for courtroom trials, say the ability to cherry-pick the receivables they want to sell has helped attract a wide pool of buyers.
Visual Evidence chooses to sell its more recognizable receivables, said its president, Daniel Copfer. "They sell a lot quicker," he said.
Copfer's company turned to the Receivables Exchange after its bank cut off its credit line, leaving it scrambling to maintain its cash flow, he said.
"It's very tough right now being in business," Copfer said.