Don't Sell Receivables Short.

Commodity: Something used or valued, especially when regarded as an article of commerce.

Webster's Third International Collegiate Dictionary

For centuries, only things mined or grown were considered commodities. With the onset of the industrial revolution and mass production, manufactured items were included in the definition. Today, however, a commodity is broadly defined not so much by its physical attributes as by its ability to be priced and traded on a mass scale. We now trade financial instruments just like any physical commodity. For example, home mortgages are regularly bundled into portfolios so that these securities can bought and sold throughout the financial community as well as to private investors in the form of bond funds.

Considering the increasing sophistication of the financial marketplace, the question arises as to whether or not trade receivables will attain commodity status and the impact that this might have on the commercial credit profession. Reviewing the emerging trends will provide some idea of where receivable management is headed. Just as important is consideration of the challenges that must be overcome if trade debt is in fact to become a commodity. From there, it will also be possible to make some assumptions regarding the effect of treating receivables as a commodity will have on the commercial credit community.

A Pattern to Follow

As was already mentioned, there is some precedent for debt obligations, with similarities to trade receivables, becoming commodities. Chances are, most readers who own a home have had their mortgage sold at least once. Many readers will have also invested in Ginnie Mae mutual funds made up of pooled government-backed mortgages. But mortgages aren't the only type of debt instrument that have taken on the characteristics of a commodity. The credit card debt markets provide an example closely related to the marketplace for trade receivables. Bundled into securitized asset pools, credit card debt is sold as commercial paper. Even when it is not securitized, credit card portfolios are regularly bought and sold for the value of their underlying receivables.

Much the same is true for auto loans, commercial leases and business loans: all provide precedents for the transformation of trade receivables into a commodity. Moreover, these industries, and especially consumer credit, have typically been out in front of the trade credit community in terms of innovation and the implementation of new technologies. For example, using credit scoring models has been standard practice for retail credit operations for quite some time now, but is only just beginning to gain broader acceptance by trade creditors. Undoubtedly, the reason innovation has come sooner to the consumer credit world is the vast amounts of currency flowing through that sector. Nevertheless, with outstanding US trade receivables estimated at $11 trillion, there is more than enough money involved to attract the attention of investors interested in building new business-to-business infrastructures as well as to ensure liquid markets.