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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.
The service went live in November of and now has about 65 buyers. There are more than 1, 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.
Both buyers and sellers are vetted by the Receivables Exchange before they can use the service. 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.
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. 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.
The typical pay cycle "is running 45 to 60 days," he said. Visual Evidence chooses to sell its more recognizable receivables, said its president, Daniel Copfer. 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. Article Underwriting self-employed borrowers Freddie Mac helps lenders to better serve this expanding market segment.
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