Nicolas Perkin Putting Capital Back to Work The Receivables Exchange Creates a New Way for Small and Midsize Business to Manage Cash Flow Innovations Case Narrative: The Receivables Exchange I have always had a fascination with disruptive technologies, an inclination that has often led me to think about how we might disrupt the status quo or provide an innovation that favors a more efficient or convenient arrangement of the market- place. In the last 20 years, we have seen numerous disruptions that have forever transformed businesses and lifestyles—cell phones and computers are the most obvious examples. Despite these advances, the way small and midsize businesses (SMBs) secure capital has changed very little for many decades. My vision for modernizing accounts receivable and getting working capital into the hands of small and midsize businesses, together with my partner Justin Brownhill’s idea for an exchange and his experience with electronic trading technology, led to the establishment in 2007 of The Receivables Exchange, and the launch in November 2008 of the world’s first online capital marketplace for buying and selling accounts receivable. In doing so, we succeeded in providing a new solution to the age-old problem of cash flow that almost all businesses face. Moreover, by establishing our headquarters in New Orleans, we also have had the opportunity to play a central role in building the dynamic and entrepreneurial city that has emerged since Hurricane Katrina. The credit crisis of 2008 and 2009 made it nearly impossible for a business of any size to get access to capital, much less the millions of SMBs that took the brunt of the financial fallout. Given that our launch occurred in the midst of the crisis, people sometimes assume that we developed The Receivables Exchange in response to it. However, the idea for the Exchange was born out of a fundamental belief that SMBs should have unfettered access to capital in the same way that large companies have access to the stock exchanges and the commercial paper market. Nicolas Perkin is the Co-Founder and President of the Receivables Exchange. © 2010 Nicolas Perkin innovations / summer 2010 75 Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/INOV_a_00029 by guest on 02 October 2021 Nicolas Perkin Most businesses that transact with other businesses sell their products or services with the expectation of receiving payment at a later date, and as such, all experi- ence the frustrating problem at some point of having great sales on paper but no money in the bank. Given the importance of having cash to pay bills and buy raw material for new orders, financial products have emerged throughout the years to satisfy businesses’ need for cash. However, barriers to accessing this capital, such as exorbitantly high interest rates, excessive guarantees demanded from the borrow- er, or drawn-out approval processes by banks, all but eliminate SMBs’ financial incentive to take advantage of these options. The Receivables Exchange has disrupted the status quo by making the process by which SMBs access working capital more efficient, fair, and transparent. We are helping small businesses meet their funding needs at the same rapid pace of busi- ness today. The process starts when an SMB, the Seller, sends an invoice to a busi- ness, the account debtor, that has received a good or service from the Seller and has to pay within a given period of time, say 30 or 90 days. During this period, the Seller still needs capital to buy supplies for new orders, pay employees, or pay its own bills. So, instead of waiting for the debtor to pay up, the Seller—whose busi- ness has already gone through the due diligence review process to become an approved Seller on the Exchange—uploads the receivables it wants to sell onto the Exchange trading platform. Once we’ve verified the invoices and the Seller has set its auction parameters, such as the minimum advance amount (the amount of funds it wants to receive at the close of the auction from the Buyer), the maximum discount (the amount they are willing to pay for the sale), and the maximum dura- tion of the auction, the auction can begin. In our online auction-based marketplace, accredited institutional investors, Buyers, compete in real time to purchase the receivables, bidding against other Buyers or choosing to pay a buyout price—optimal terms set by the Seller which automatically closes the auction. Generally lasting one or two days, some auctions close in only a few minutes. The advance amount plus the Buyer transaction clos- ing fees is then sent via reverse wire from the Buyer to the Exchange, and on the next business day, The Receivables Exchange wires the advance amount, minus the Seller transaction closing fees (% of auction value), into the Seller’s operating account. When the account debtor pays the Seller’s invoice, The Receivables Exchange reconciles funds and disburses net amounts: Buyers receive the advance amount plus accrued discount fees, and Sellers receive the remaining amount. By using the Exchange, the Buyer diversifies its investment portfolio and gains access to a previously untapped asset class, a $17 trillion receivables market. In addition, through transparency and standardization of information on The Receivables Exchange, Buyers are able to perform risk assessments and place com- petitive bids to meet their investment strategy. This represents a departure from traditional financing, where a Seller’s credit risk is often based solely on historical revenues rather than the strength of its cash generation and high-quality account debtors. A further enhancement is that as Buyers become more familiar with indi- vidual Sellers, their auctions, and the payment activity of their account debtors, 76 innovations / summer 2010 Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/INOV_a_00029 by guest on 02 October 2021 Putting Capital Back to Work their familiarity and understanding of Sellers and account debtors increases and is reflected in their bidding. As a result, most Sellers realize a significantly reduced cost of capital as they build their transaction history on the Exchange—30 percent, on average. The ease and transparency we provide at every step of the transaction for Buyers and Sellers has transformed a formerly underutilized asset into an affordable, secure, and mainstream business financing option that enables SMBs to improve liquidity and get access to the cash they need to keep growing—all on terms they set. The Receivables Exchange has grown much more quickly than we had expect- ed, both in terms of revenue and the number and size of trades. In the first half of 2010, we reported growth over 200 percent, and we continue to see record double- digit growth month after month. Over a thousand Sellers from 49 states now sell their receivables on the Exchange, and we’ve already seen a higher volume of trans- actions in one month than eBay saw in its entire first year. When one considers that accounts receivable in the United States alone total $17 trillion, shared among nearly four million B2B companies, we’ve only barely scratched the surface of our potential. I’m proud that The Receivables Exchange counts itself among the first of the many start-up companies that have committed to New Orleans after Hurricane Katrina, and that continue to drive the city’s entrepreneurial rebirth. Basing our operations in New Orleans has made sense financially because of the affordability and tax incentives the city offers. New Orleans has a high profile throughout the world as a Great American City and boasts a strong historical association with trade and exchange. Like us, many are rooting for New Orleans to succeed. Since we arrived, like-minded entrepreneurs and other talented professionals have flocked to this city, which has undeniable electricity flowing through it right now. We have folks on our team from London, Barcelona, San Francisco, New York, Atlanta, and many other cities. We also have managed to attract many New Orleanians, who have always wanted to move back but couldn’t for lack of viable career options. Regardless of their origins, everyone at The Receivables Exchange has come here to take part in the birth of an entirely new capital marketplace for SMBs and the rebirth of New Orleans. The Receivables Exchange has turned the tables on small business financing. Never before have small and midsize businesses had the flexibility and control over their business financing that the Exchange provides. With Buyers competing to purchase their receivables and give them the best cost of capital, Sellers are able to gain access to affordable capital when they need it and how they need it. We are using the technology of today to bring cash flow management into the 21st centu- ry, thus providing business financing at the pace of today’s business. THE NARRATIVE The original vision for The Receivables Exchange derives from one of the most unquestioned, fundamental economic activities. In most business-to-business innovations / summer 2010 77 Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/INOV_a_00029 by guest on 02 October 2021 Nicolas Perkin transactions, the buyer of a product remits payment for a purchase according to an agreement between the buyer and seller. This relationship between businesses, called trade credit, lies at the heart of every business’s capital management, and sometimes amounts to a cash flow tug of war. Companies need cash to produce their goods and services, so they push out what they owe (payables) as far as they can and pull in as quickly as possible what other companies owe them (receiv- ables). In doing so, they manage the amount of actual cash their business has, hopefully in a manner that allows for growth.