Sunday, April 08, 2007

Small Business – Faster Cash, Lower Cost

Here’s a question for all the small businesses in the world.

If you only had limited (or expensive) access to working capital, how fast would you jump at a chance to improve your working capital, accelerate cash flow, speed up collection of accounts receivable and reduce your days sales outstanding all at a cost of less than 1% of sales?

No, it’s not a trick question but rather the solution of the future for small businesses who are tired of carrying the paper for their big customers or paying as much as 3% a month for factoring. It’s known as supply chain financing and PrimeRevenue is one of the first to offer this service. You can check out PrimeRevenue’s website for more on the mechanics of supply chain finance.

After seeing Financing the Chain in CFO Magazine’s February edition, I contacted Peter Lugli, the Vice President, Marketing and Corporate Development of PrimeRevenue and discussed how this product helps small businesses. Here are a couple things I learned from my chat with Peter…

The dog wags the tail – a small business can’t register to use the service unless it is a supplier to a large corporate buyer already using the service. PrimeRevenue is working directly and indirectly with approximately 20 Global 2000 companies such as Big Lots, Dupont and Sainsbury’s. These large corporations are able to put their small business suppliers on a more equal footing with larger suppliers by offering working capital financing tied to their own credit rating which is typically investment grade. That’s where the big savings for small business suppliers comes into play.

There is no charge for a supplier to register to use the system and view buyer invoicing and payment status information. A couple of click-through online agreements and bank account registrations followed by an hour of training and the small business supplier will be on its way to accelerated cash flow.

When a supplier opts to accelerate payment of a specific invoice, a third party lender issues an electronic payment using the protocol of the supplier’s choice. A supplier is only charged a fee if payment of an invoice is accelerated and the fee is tied to how much sooner they opt to receive payment and the buyer’s creditworthiness.

PrimeRevenue believes the greatest advantages will initially be enjoyed by the automotive industry, big box retailers, diversified manufacturing and high tech. The most likely companies to implement supply chain financing with their suppliers will likely generate a minimum of $500 million in annual revenues.

My thoughts?

This is a product that will be of great benefit to small business once two things happen.

First, there must be a critical mass of big companies willing to implement this system and make it widely available for its small business suppliers. I could see this financing technique work well in a variety of situations if early adoption is aggressive.

Second, the product must be easy to use in conjunction with the supplier’s existing lenders including banks and factors. If existing lenders cooperate over lien releases (no guarantees they will), then all the parties can peacefully co-exist. But if existing lenders see this as more of a reduction in the quantity and quality of their collateral rather than a chance to improve the overall financial stability of their borrower, adoption by small business will be protracted.

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