When Your Suppliers Swim in (Loan) Shark-Infested Financing Waters
When I first started researching and covering procurement, it was rare to find an article in a popular newspaper or magazine about the area. But now, it seems to happen at least once a week. Just this weekend, The New York Times published a highly insightful piece on the high-interest, high-stakes world of purchase order financing. According to the story, "It is a relatively new line of business ... and a twist on the ancient and much larger practice of factoring, in which a business sells an invoice at a discount to get its money faster, providing the factoring company with a hefty fee." But, "Purchase-order financing, though similar to factoring, is further up the financial food chain. Purchase orders are written guarantees from a buyer that it is committed to purchasing a product. By financing purchase orders ... [the lender] essentially pays the factory to manufacture the goods."
All of this sounds useful enough. After all, purchase order lenders are stepping in where banks are stepping out. But the APRs involved are enough to spell trouble for suppliers operating on already thin margins. How high? Try a typical "3.5 percent for the first 30 days, and 1.25 percent for every 10 days after that, an annualized percentage north of 40 percent." Yes, you read that correctly. Suppliers are paying over 40% APR to obtain credit in a situation where the lender's risk is reduced because they're dealing directly with a supplier’s supplier.
If your suppliers are forced into this type of financing arrangement on a regular basis, it's high time you explore dynamic discounting options to step in -- potentially with the help of a bank or third-party providing liquidity off of your own credit rating -- and become a better partner to your suppliers by offering a lower APR for early payment on previous invoices (not to mention potentially turning your A/P group into a profit center in the process). Prime Revenue, Oxygen, Ariba, The Receivables Exchange, Orbian, OB10, Demica and Tradecard are all providers to consider in this area.
- Jason Busch
Tweet
TweetBacks
We’re (The Receivables Exchange) hearing from companies of all sizes and industries who are turning to our exchange-based receivables marketplace to improve their cash flow and gain quick access to affordable capital. On the Exchange small and midsize businesses (Sellers) post their outstanding invoices and buyers compete against one another and bid to purchase them in real time. Finally, small businesses are in the driver’s seat - they set all the terms of the auction. While, the Exchange uses the same underlying asset (accounts receivable) as factoring companies, the structure of the transaction is entirely different. The Receivables Exchange puts the business in complete control of their financing, while providing transparency, price visibility and quick access to a competitive source of funding through an online auction marketplace.
Just last week we announced that we closed our Series C funding round with a tremendous investment of $17 million and the backing of the leading venture firms in the country, Bain Capital Ventures and Redpoint Ventures. This funding is testimony to the power of our exchange-based receivables finance model and the tremendous pent-up demand for a flexible working capital management solution. With this investment we look forward to scaling our efforts even further to deliver billions of dollars of competitively priced capital to the millions of SMBs across the nation.