Management Accounting

Fast Cash for Small Firms

With bank credit tight, services for turning invoices into cash are growing in popularity.
Alix StuartFebruary 25, 2011

As small businesses hunt for working capital, services that let CFOs quickly turn receivables into cash are growing in popularity. Transaction volume on The Receivables Exchange, an online auction platform for invoices, is five times what it was a year ago, and president Nicolas Perkin expects similar growth in 2011. The Interface Financial Group (IFG), a 39-year-old set of franchises that buys small numbers of invoices straight from business owners, says volume is up between 10% and 12%. And a new PayPal-backed business aimed at guaranteeing payments from consumers, BillFloat, has already attracted 100 businesses since its launch last July.

One reason for the spike is that banks are still loath to lend to small and sometimes young companies. “In normal times, the businesses referred to us by banks would be one, two, or three years old,” says David Banfield, president of IFG. “Now we’re seeing all of those plus more mature companies with five to seven years in business being referred to us. There’s no indication that will change in the near future.”

The relative ease and speed of the programs are also appealing. IFG, which says it can get cash into the business owner’s hand within four days of its first discussions with the company, conducts a standard credit check on the business, as well as verifies that the company’s customer has received the product and is satisfied with it. “It’s a much more streamlined process than factoring all your receivables,” says Banfield. IFG’s typical client has between $400,000 and $4 million in annual revenue and needs about $30,000 to $60,000 for a given transaction, he says.

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On The Receivables Exchange, sellers must register and meet certain criteria, such as being in business at least two years and having at least $2 million in annual revenue. But there are no rules on which invoices they can put up for sale or how much they can ask. Buyers, however, can see if the seller has a history of invoices that were not paid. “Companies usually sell their best invoices, because they want to establish a track record and reduce their cost of funds,” says Perkin. The exchange currently has about 1,450 registered sellers.

A different approach, and one that requires even less effort or risk, is to offer customers an easy way to finance their outstanding balances. NewWave Communications, a Midwestern cable operator, recently introduced BillFloat on its Website, giving its 100,000 customers an online way to borrow money to cover their bill rather than just ignore it. “There’s no cost to us, and we’re getting payments before their due dates rather than late,” says Kathy Klipfel, NewWave billing and credit director. So far, only about 20 customers have successfully used the service (customers must be approved for the loan by BillFloat) but Klipfel hopes it will take off eventually. “Even if we did offset some revenue associated with late fees [currently $7 per month], it’s still worth it to deal with our aging accounts,” she says.

The terms of such deals can vary quite a bit. Banfield says IFG will pay anywhere from 91% to 96% of an invoice’s value, depending on its age. On The Receivables Exchange, sellers set their own terms. In both cases, sellers are ultimately responsible for nonperforming invoices. With BillFloat, however, a company such as NewWave gets its money free and clear.

As alluring as such easy fixes sound, however, some point out that prevention is still the best cure for aging receivables. Such services cost “10 to 20 times what it would cost you to do internally,” estimates Pam Krank, president of The Credit Department, a credit-management outsourcing firm. “If you’re liberal on credit, you need to be conservative on collections. It just takes a little discipline up front: you set up terms and you stick to them.” She also advocates taking a second look at extending credit at all. “If you have to offer terms, you must make sure the risk makes sense,” she says, and perform some type of credit check to make sure the client doesn’t have other unpaid invoices or outstanding liens.