ACD Financial Services is a member of The Receivables Exchange which was the subject of a very favorable article in the Wall Street Journal. Contact us at www.ACDFinancial.com or 678-565-9870 to learn more about invoice factoring and The Receivables Exchange.
ACD Financial Services Alternative Financing for Small Business ACDFinancial.com 678-565-9870
By Jacob Bunge
Of DOW JONES NEWSWIRES
CHICAGO (Dow Jones)--The turmoil surrounding finance giant CIT Group Inc. (CIT) is driving a surge in new business for a New Orleans-based company that runs a market in receivables.
The Receivables Exchange, which lets small- and mid-sized companies auction their accounts receivable to buyers that include hedge funds and commercial banks, on Wednesday recorded its busiest day ever and is fielding a flood of calls from businesses searching for financing alternatives.
"These people want to do their own underwriting and do their own credit determination," said Justin Brownhill, co-founder and chief executive of The Receivables Exchange, or TRE.
Events this week have shown that "they can't rely on others like CIT to do it," Brownhill said.
New York-based CIT, among the biggest U.S. lenders to small and mid-sized businesses, disclosed this week that it could face bankruptcy and won't be able to get help from the U.S. government.
The company is among the biggest names in the factoring marketplace, a $125 billion sector that functions as a middleman for short-term financing - paying vendors for goods up front and collecting full payment from retailers later.
Factors extend credit to many businesses that don't have the capitalization or credit rating to do business with traditional lenders.
CIT did $42.2 billion in factoring business last year; faced with the possible failure of a major credit provider, small and mid-sized businesses are now scrambling for short-term financing alternatives in an already tight credit market.
The Receivables Exchange, which opened for business in January, is positioning itself as a new option.
"When you think about somebody like CIT, they're a single point of failure, and we have a market-based solution that brings all these sources of funding together at an auction," said Brownhill.
The company's electronic market model, which resembles that of eBay Inc. (EBAY), lets businesses such as vendors sell their short-term debt at auction and generate cash quickly, while buyers earn a profit when the debt is paid back by retailers or others.
Receivable sellers at TRE include textiles, media, manufacturing and technology companies. Hedge funds represent about half the buyers, along with factoring companies, commercial banks and other participants.
Competition among receivables buyers has driven price discovery in the receivables market, Brownhill said, helping businesses get a better lending rate than they would by going straight to factors such as CIT, Wells Fargo & Co. (WFC) or GE Capital Corp., a unit of General Electric Co. (GE).
TRE's average rate ranges between 1.5% and 2%, with factors generally charging a fee of between 2% and 7%.
From January to June, TRE saw a tenfold rise in sales of receivables, Brownhill said. With nearly 1,000 auctions completed to date, the company has facilitated about $65 million in loans this year.
TRE's growth comes as CIT, last year the top lender under a U.S. Small Business Administration program with $770 million in loans, has scaled back lending activity.
CIT made less than $60 million in loans between October 2008 and May 2009, according to data from the Small Business Administration.
Brownhill said TRE's participants represent more than $20 billion of deployable capital available to finance small businesses.
"As an organization, we aren't dependent on lines of credit and we're not relying on the capital markets, which have dried up generally in this credit crisis," Brownhill said.
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