accounts receivable securitization.pdf

Accounts Receivable Securitization By Adrian Katz akatz@ Chief Executive Officer Finacity Corporation th 281 Tresser Blvd., 11 Floor Stamford, CT 06901 By various estimates, a tally of accounts receivable as reflected in the financial statements of U.S. companies would total approximately $10 trillion, with a comparable amount outstanding in Europe and more in the rest of the world. In order to bridge the typical timing gap of cash inflows and outflows, companies frequently seek funding from lenders, factors, and the capital markets (via pledges or sales of accounts receivable). Accounts receivable financing is a highly efficient means of satisfying many financial demands and it has been employed in various forms for centuries. In addition to the older methods of factoring and asset-based loans, accounts receivable have been securitized since the 1980s, with an estimate of approximately $60 billion outstanding in the U.S. PROBLEM Notwithstanding the history and breadth of funding techniques, it is this author’s opinion that accounts receivable are generally inefficiently funded despite their typical characteristics as one of the most creditworthy and liquid financial assets on a corporate balance sheet. This discussion will focus solely on commercial accounts receivable, which may also be referred to as receivables. Various cash-flow-generating assets, such as mortgages, automobile loans and credit card receivables, have been successfully securitized on a broad scale. Despite the well- publicized problems with residential lending, a new home mortgage is more likely than not of to be included in a securitization pool. However, by stark contrast, securitization of receivables represents less than 1% of the market size. Traditional wisdom and experience suggest that the pricing, transparency and structuring disciplines of the capital markets (per the requirements of the securitization process) should result