Take My Receivables, Please!

Suppose a small business owner comes to you seeking a line of credit-his growing and profitable company has cash flow problems because customers aren't paying on time. For one reason or another he doesn't qualify for the line of credit, yet this is a company you would like to have a relationship with and perhaps extend credit to in the future. What do you do? West Coast Bank in Sarasota, Fla., might offer to buy the business's monthly accounts receivable at a discount with full recourse. The customer would get cash up front each month and the bank would get fee income from the discount. This $70 million-assets bank, along with numerous other community banks around the country, purchases receivables through an ABA-endorsed program called Business Manager from Private Business, a firm based in Brentwood, Tenn. Under this program, the risk often associated with credit secured by accounts receivable is lessened because the bank sends out the bills and payments are sent to the bank rather than the customer, so the bank can pay itself back right away. Also, the customer must keep a reserve account at the bank, based on the aging of the receivables, that can be tapped when the customer's clients are more than 90 days past due. Joseph D. Hudgins, president of the bank, draws the following comparison between a revolving line of credit secured by accounts receivable and this service: A $250,000 line of credit would likely be priced at 2.5% over prime, which in early January would have meant 11%. If the line was fully drawn throughout the entire year the bank would earn $26,200 in interest and its cost of funds might be $13,000, leaving approximately $13,000 in income. This is a fairly risky credit because it's difficult for the bank to monitor the receivables carefully. Using Business Manager, the bank would buy the company's receivables at a 3%-5% discount. At $250,000 a month the bank would make $90,000 a year, which minus the same $13,000 cost of funds and $30,000 in licensing fees to Private Business, would yield $47,000. This product requires more clerical support, however, than a line of credit because of the bookkeeping. West Coast has two full-time people handling this function for 28 businesses. Hudgins expects that in 1995, the program will generate between $700,000 and $750,000 in noninterest income and expenses, including salary expense, will be about $250,000, thus it will net $400,000-450,000. Another participant in this program, $55 million-assets Pennsylvania State Bank, Camp Hill, generated $143,364 in fee income and $30,691 in interest income from the program in 1994. The program had $1.3 million in outstandings in January. Why they'll pay more Small businesses obviously pay more for this service than for a line of credit. …