“I’m going to get paid, the question is when,” Jones said.
But HedgeCheck needs the cash for payroll. In the past, when payments took too long, Jones occasionally took money out of his retirement fund to support his business.
About six months ago, Jones started selling the unpaid invoices he’d accumulated to online buyers seeking short-term investments. The process, traditionally known as factoring, allows the seller to get an advance from a third party on a currently unpaid invoice.
Jones had tried taking these invoices — known as accounts receivables — to banks, but found that most wouldn’t handle accounts worth less than several million dollars. HedgeCheck’s invoices are typically for several thousand dollars each.
He had better luck with the Receivables Exchange, a New Orleans, La.-based online platform allowing businesses to auction accounts receivable to accredited investors. Businesses can post invoices on the service, and specify the minimum advance they would accept and the maximum fee they would pay. Investors can then bid on the offer.
Unlike the process of factoring, a customer responsible for paying the invoice on the Receivable Exchange is not notified of the transaction, and the responsibility for collecting the payment remains with the seller.
The average auction lasts 11 hours, and businesses can often receive cash within a couple of days, according to the site. Auctioned invoices have ranged from $3.5 million to 30 cents, and more than 99 percent offers are funded.
In the past six months, Jones has completed five or six auctions, each for several thousand dollars. He paid an initial registration fee of $500, a $10 fee for each account auctioned, and transaction and administration fees based on the terms of the auction. In most cases, the investor agreed to advance his business at least 85 percent of the invoice, and Jones has received the cash within 48 hours, and has only paid a few hundred dollars in fees for each auction.
The Receivables Exchange says it runs background checks on sells and requires businesses to have a minimum of one year of operating history and at least $500,000 in annual revenue. The receivables must be from other businesses or the government. More than 2,000 small businesses have used the platform since it was founded in 2007, and the site currently has between 50 and 75 investors, according to Chief Marketing Officer Greg Kenepp.
The Receivables Exchange, which touts itself as the first online marketplace for trading accounts receivable, is one of only a couple of similar platforms. It received $17 million in funding from Bain Capital in 2010.
Traditional funding sources often put more constraints on the business than less formal systems like the Receivables Exchange, Kenepp added. “They tend to want businesses to sign up for small business contracts and a personal guarantee,” he said. “Understanding the nuances of financing vehicles and the variety of companies is very difficult.”
Alternative financing like this typically appeal to young companies that haven’t yet been able to establish lines of credit with larger banks, said Alexandria-based financial expert Bert Ely .
“If you have a good business, it’s a bankable business. Once you establish a line of credit and working capital, and it’s properly secured, [banks] become very easy to work [with],” he said. “Many small businesses do a lousy job of presenting themselves to a bank, and understanding the banker’s perspective,”
He cautions that if methods like the Receivables Exchange is a small business’ only option for raising capital, it may be operating on “too much of a shoestring.”
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