Wednesday, August 19, 2009

It's a Balancing Act

In our last post we discounted to some degree the technical problems required to manage a significantly increased deal flow on The Receivables Exchange. There ARE technical issues to be addressed and they ARE important, but the fundamental requirement of attracting more Buyers and more Sellers to the exchange is the true challenge.

But numbers alone are not enough. Quality and balance are equally important in these early days of the exchange’s growth.

What do we mean by quality?

In terms of Sellers, we mean that TRE has to attract Sellers that have the capacity to make good on their commitments to re-purchase invoices if their Account Debtors do not pay.

We’ve pointed out in prior posts the fact that TRE obtains only limited acknowledgments from Debtors and that those do NOT include affirmation of the acceptability of the goods provided or services performed. We’ve pointed out also that there are no personal guarantees to back up the Seller’s own corporate capacity and that the UCC filings obtained by TRE encumber only the receivables actually traded on the exchange.

If there haven’t been situations yet in which the Account Debtor justifiably refuses payment; rest assured there will be. And if the Seller doesn’t have the money to make good, all parties will be damaged, including TRE.

In terms of Buyers, we mean that TRE has to attract prudent investors concerned about the quality of the obligations being purchased and the strength of the Sellers they buy from. Buyers have to understand the quality (or lack thereof) of the financial information made available and the risks involved in dealing with smaller and financially weaker companies than they might be used to.

TRE needs to seek an orderly and balanced increase in the relationship between deal flow and Buyer demand. That’s a tough job; especially with so much riding on rapid growth assumptions.

The current deal flow cannot yet absorb really substantial cash inflows. One Buyer with a perceived “need” to put money to work in any significant quantity could easily absorb the entire current deal flow and create a pricing environment that is not informed by any real risk assessment.

Can TRE be expected to counsel caution to Buyers willing to take any deal that comes along?

Can TRE be expected to turn away Sellers whose financial capacity and business characteristics do not meet its own stated requirements?

Not only CAN it be expected to do those things. If it doesn’t do those things; if it doesn’t work very hard to create an orderly and rational trajectory to its growth; it runs the risk of suffering the unhappy fate of other new markets which were overly focused on near-term growth objectives and into which undisciplined capital was allowed to move too quickly.

None of us needs that; least of all the exchange itself.


  1. Excellent point. This is why partnering with companies such as Ariba makes so much sense and is critical to the quality of the TRE marketplace. When a receivable is uploaded by a seller directly from the Ariba Network, it represents an unbroken chain of positive payment approval confirmation coming directly from the Obligor's ERP system. This should significantly reduce the risk profile of these receivables and thus benefit the supplier even more by lowering the ultimate cost of capital achieved on the Exchange.

  2. Hi Drew,

    Thanks very much for the comment. Can you expand a bit on the idea that a receivable posted by an Ariba Seller "represents an unbroken chain of positive payment approval confirmation"?

    That suggests that the Ariba Seller's confirmation quality is in some way more robust than that of other TRE Sellers.

    If that is true then Buyers should certainly be aware of the difference since pricing should, as you suggest, be affected.

    Can you elaborate? Thanks.