Re-engineering a firm's growth strategy

March 2012 » Features » BUSINESS CASE STUDY
Online receivables financing provides an alternative for quick access to cash
Nic Perkin

 

Objective
Obtain working capital cost effectively to finance firm growth

Firms

Mason-Grey
Entex Technologies

Product application
The Receivables Exchange allows firms to sell receivables in online auctions to help meet cash flow needs.

As the U.S. economy slowly emerges from the recession, the civil engineering industry can expect increasing activity. For engineering firms to pursue new opportunities they might need to recruit qualified workers quickly, retain top talent, and invest in equipment and technology – efforts that require sufficient working capital. Engineering service companies typically have a high proportion of total costs coming from salaries, and these are recurring costs. And, as most firms rely heavily on cash to pay salaries, they must keep a watchful eye on cash flow to ensure they don't over-extend themselves.

Unfortunately, the financing needed to overcome these working capital challenges has become increasingly difficult to secure. The economic downturn has caused banks and financial institutions to tighten their lending standards. Other traditional financing sources, such as factoring companies and asset-based lenders, impose sizeable fees and require all-asset liens and personal guarantees, making them less attractive options for firms needing access to fast and affordable cash.

When all the fees, penalties, and risk are added up, traditional financing is not necessarily the most inexpensive or worry-free option. In the changing economy, it's important for engineering firms and their finance executives to examine innovative alternatives that in many cases are cheaper than traditional financing, and that carry fewer restrictions.

One such alternative is online receivables financing, where your business can sell receivables in a real-time, online auction. Online receivables financing allows firms to sell invoices to multiple institutional investors to get the most competitive pricing. Businesses get 98 to 99 cents on the dollar, on average, in as little as 24 hours. There are no personal guarantees, all-asset liens, contracts, or hidden costs, and there is no obligation to trade.

Firms find financing
Two engineering firms, Mason-Grey and Entex Technologies, found online receivables financing to be more cost effective than traditional financing, and a better strategy for fueling continued growth.

In its early years, Mason-Grey, a Georgia-based engineering services firm, easily funded its growth through internal cash flow. The firm provides highly specialized engineering services to improve industrial process plant efficiencies. As Mason-Grey's clients began to feel the impact of the recession, demand for its services began to slow, but opportunities for growth were still apparent.

"Like most small companies we always struggled with cash flow, which meant we sometimes had to pass on great opportunities," said Mason-Grey's owner, Joe Reini. "I could have grown our book of business at a much faster rate if I wanted to, but that would have required some form of financing, which would entail adding more financial risk to my business. I was never comfortable with that approach."

Reini first became aware of online receivables financing in 2009, after seeking a secure line of credit he could tap as needed to finance several new business opportunities. He found that banks were only willing to extend him a line for a small proportion of the company's outstanding accounts receivable. This is common with engineering service companies that do not have tangible collateral to use as security for a loan. Reini was turned off by the small size of the credit line and the constraints it would impose on his company, including a personal guarantee. He began looking for alternative approaches to finance his company's growth and found The Receivables Exchange.

Reini applied to join The Receivables Exchange in 2009, and after his first auction, was hooked. Not only were the receivables sold on his terms and the funds wired into the company's bank account 24 hours later, after only a few auctions he was able to reduce the cost of capital by building a consistent transaction history on the Exchange, thereby improving his appeal to buyers. As The Receivables Exchange's buyers saw more successful auctions coming across from Mason-Grey on a regular basis, their bids grew more competitive, as they each tried to win the auction.

When all the fees, penalties, and risk are added up, traditional financing is not necessarily the most inexpensive or worry-free option.

"Having access to working capital is an ongoing concern for most companies, both large and small," Reini said. "Today, banks want to see two years of solid financials before they will even consider approving a loan – a difficult hurdle for companies who are in a turnaround situation. With the use of online receivables financing we have been able to accelerate our growth when we want – on our terms. Today, if a client needed us to grow by 30 percent overnight, we can. I can add the staff, make them billable, and immediately turn those new hires into cash."

In the case of Entex Technologies, which custom-engineers large wastewater facilities in North America, online receivables financing also proved to be an ideal strategy for meeting fluctuating cash flow needs. The company, while primarily investor financed, also chose The Receivables Exchange to have a flexible way to finance large projects that didn't carry high costs or heavy restrictions – and to remain competitive.

Entex President Wayne Flournoy said the main advantage of The Receivables Exchange is that it's flexible enough to adapt to the fluctuations of the engineering business.

"We aren't like a restaurant where you have a steady stream of people coming through. We run multiple projects at one time, but it's a very lumpy business," Flournoy said. "The whole task of managing working capital and cash flow is a pretty challenging one. The Receivables Exchange gives us the ability to turn receivables into cash whenever we need to, very quickly."

Flournoy has also found The Receivables Exchange to be more cost effective than traditional financing, and a better strategy for fueling growth than keeping large cash reserves.

"When you look at other sources of financing, increasing working capital is a very expensive proposition," Flournoy said. "Having cash around is expensive and bank loans are quite expensive relative to what we're paying with The Receivables Exchange."

Because the Exchange does not require sellers to monetize all of their invoices, but instead allows them to choose when and at what price to sell individual invoices, Mason-Grey and Entex maintain complete control over their cash flow.

Nic Perkin is co-founder and president of The Receivables Exchange (www.receivablesxchange.com), an online marketplace for sale and purchase of accounts receivable.


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