RECEIVABLES FINANCING: A New Frontier for Small Business Lenders

ABA Banking Journal, February 1999 | Go to article overview

RECEIVABLES FINANCING: A New Frontier for Small Business Lenders


Community bankers have long associated receivables purchasing with poor credit, high risk, and low profits. Primarily considered the domain of independent factoring companies and large money-center banks, the practice is often found guilty by association.

In the past decade, however, community banks have sought out new ways to battle with other financial institutions to retain and expand their customer base.

To a large extent, that customer base is made up of small- and medium-sized businesses, which in the aggregate represent a huge market: some 23 million U.S. businesses with up to $50 million in annual sales. Increasing competition for that market and decreasing net interest margins have forced these banks to reevaluate non-traditional lending products, sending promising products like receivables purchasing programs to the top of the list.

Thanks to innovations pioneered by Private Business, Inc. (PBI), accounts receivable purchasing has gained more prestige, a smart new look, and a completely new lease on life. PBI equips community banks with the tools needed to penetrate the small business market and compete with other small business lenders, while experiencing net returns as high as 10% to 15%-easily bearing net interest margins for traditional lending products.

The making of a Leader

Formed in 1991, PBI was the first company to offer an accounts receivable management program to small banks. Today, despite the emergence of other companies offering products with characteristics similar to PBI's products, the firm continues to be the nation's leader in helping banks help small business owners improve their cash flow and grow their businesses through receivables financing.

PBI has established partnerships with over 1,200 banks to serve more than 15,000 businesses in all 50 states. The centerpiece of those relationships is the company's Business Manager program, a turnkey product that combines marketing and sales efforts with a PC-based software package to deliver a complete system for purchasing and managing a commercial customer's receivables. Most importantly, Business Manager has proved itself an effective risk management tool in a field where credit risks are often unacceptably high.

PBI's Business Manager program has earned the official endorsement of the American Bankers Association's Corporation for American Banking subsidiary as the exclusive receivables management program provider to its member banks. Similar endorsements have come from more than two dozen state banker associations, as well.

Additionally, many bankers, like Robert H. Santom, president and CEO of First Southern Bank, Boca Raton, Fla., are crediting the program with substantially increasing their business volume and profits. (See related story, below.) Perhaps even more impressive is how small businesses react to the program. Vic Cistulli, owner of a floor covering shop in Fresno, Calif., claims, "Business Manager has solved our cash flow problem, and it lets me concentrate on taking care of customers, instead of worrying about how to meet the payroll or pay bills."

Breaking with tradition

Bankers everywhere have heard these or similar words from small business borrowers: "Business is good, but I sure wish that my customers would pay me faster. They always keep me waiting. Sometimes I feel like I am their bank."

It's an age-old problem: The business is solid and growing, but cash flow is squeezed because customers often don't pay promptly. That puts a crimp on working capital and capital for expansion, often leaving the business owner in a bind. What businesses need, of course, is a way to unlock the money frozen in their accounts receivable. Selling these receivables for cash is often the best solution.

For many years, businesses could only find such an option from factors and large financial institutions. But these often had drawbacks: they were unwieldy, not cost-efficient, or poor at distinguishing good credits from weaker ones. …

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