By DYAN MACHAN
It's a drag when> your clients take their merry time paying their bills. But there's a solution that dates back to the Mesopotamians: selling your invoices and cashing in on the money you are owed by selling that debt to a third party.
These days the practice is known as "factoring" an unglamorous term conjuring images of cigar-chomping men in threadbare offices and much of the $140 billion business is still handled by mom-and-pop operators who haven't changed their practices much since Nineveh. But a New Orleans based company called The Receivables Exchange is bringing factoring into the current century. Since the exchange opened in 2008, it has registered 1,200 businesses to sell their invoices; 75 buyers, including banks and hedge funds, have signed on to bid on them. And the borrowers say they're getting better terms than they could get from traditional factors (never mind from banks).
It works like this: A small business lists its invoices (or "receivables") on the exchange. Then a financial institution bids to send the business a cash advance on those invoices usually 80 to 90 percent of their value in return for a cut of 1 to 2 percent a month. When the client pays, the small business gets the balance, minus that cut. (It's different from the grimier world of debt collection in that the business usually gets most of the money it's owed.)
For Nabbr, a fast-growing New York company that distributes video content, the auction came in the nick of time. During the 2008 downturn, some of its advertising-firm clients started stretching their payments from 60 days to 120 days. That meant Nabbr couldn't pay its bills on time, much less invest in a new social-gaming platform it wanted to offer clients. It tried the traditional factoring route, but Nabbr CEO Nat Minoff says the company it hired acted more like a debt-collecting agency, picking and choosing the invoices and taking over contact with the client. "Not optimal," notes Minoff.
Minoff registered with The Receivables Exchange and two days later listed his first invoices. The next day a financial institution made a bid Nabbr accepted. Minoff won't disclose the exact terms, but he says that as debt buyers grew comfortable working with Nabbr, bidding became more competitive, and the interest he paid shrunk by half over six months. Other businesses say they've also borrowed for less: Atlanta's Mason Grey, an engineering-services firm, saw its capital costs shrink by 40 percent.
It's an attractive business for buyers, too. The interest rates translate to an 18 percent annual return. The exchange, meanwhile, collects a fee from both buyer and seller, making a profit from "the velocity of money," says the exchange's president, Nic Perkin. For others, however, velocity means slipperiness: Losing the human element in factoring is bound to attract more scammers, warns Bert Goldberg, executive director of the International Factoring Association. Indeed, public records show that at least one dispute involving nonpayment at the exchange has landed in court. (The exchange says it has safeguards in place and has not experienced fraud.)
In any case, deadbeat customers still cause trouble: When your client is late paying, it's you who pays the interest until they do and you who stays on their case. If a customer doesn't pay, the invoice seller must return the advance, plus interest and fees (the exchange says its default rate is less than 3 percent higher than traditional factoring, according to Goldberg). Still, the terms are gentler than they were in Mesopotamia where deadbeats were slain.