Professor Elam

Tuesday Sept 13, 2011

In Acct 3301 Monday I discussed the process of extending credit to customers. I mentioned that one has to do an aging of receivables to stay on top of this. Once an account is over 90 days delinquent it is hard to collect.

In today's WSJ (have you subscribed yet?) the NYSE Euronext Exchange is going to promote 

The Receivables Exchange to its customers. Please click and watch the explanatory video, now why didn't I think of this?

The video explains that many firms have 60% of their working capital tied up in receivables. It may take 60 days to collect them. In the meantime they may be shut out of bank borrowing. The solution provided by TRE is an e bay style world wide auction. You list your receivables for sale and define the terms of the sale, ie you want X % of the outstanding amount and this is a description of the customer base. Then it goes on the auction block. Hedge funds, insurance companies, all over the world can buy the paper. 

And so as Dodd Frank restricts banks the internet creates alternate financing. See the WSJ editorial today on Bank of America slashing 30,000 jobs world wide. The requirement to restrict ATM fees cost BAC $475 million. At a time when we need to create jobs, it appears Congress does not understand that earning money creates, not destroys jobs. 

Update

A good post from Chelsea, notice the unintended consequence of prohiibting banks from charging for valuable servicees. The economy is a two sided equation, take away one side and there is a subtraction on the other, thanks for the insight.