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Invoice finance is key for most recruitment agencies making contract and temporary placements as it provides the funding to pay the candidates before the clients make payment against the invoices. If the facility runs smoothly then the agency should always have access to the right amount of funding to meet their needs. However, there are many factors which can have an effect on the amount of funding that the invoice finance company are willing to provide, and it is important for the agency to try to minimise these to avoid any funding restrictions.
Below are a number of ways that agencies should manage their invoice finance facilities to avoid any restrictions imposed on their funding:-

Be Wary of Your Concentration Levels

It is always great when a client gives you multiple placements to fill, but if you fulfil these requirements it could mean that a large portion of your debtor book is dominated by this one client. Invoice finance companies can be very nervous about an agency “putting all of their eggs in one basket” and having a considerable portion of the debtor book with one client. If that main client goes bust it can mean that the funds lent by the invoice finance company may not be covered by the remaining debtor book, and could cause the agency to owe more than what is available based on the debtor book prepayment. Invoice finance companies will monitor these limits themselves and disapprove funds if you are over the agreed concentration levels, so it is best to have a good spread of clients and debt.

Credit Check Your Clients and Monitor The Funding Limits

Invoice finance companies always base their funding decisions on the risk element of the clients being invoiced. In order to reduce this risk, it is advisable to only do business with clients who have a good credit rating, or with clients that the invoice finance company can fund. If you do business with a client who has a poor credit rating or who the invoice finance company can only provide limited funding on, then they will not provide the full required funding and will place restrictions on each invoice raised.

Avoid Raising Large Credit Notes

The raising of credit notes by an agency is not popular with invoices finance companies as they can indicate that agencies are over invoicing to gain additional funding, also known as ‘fresh air invoicing’, or are not following correct procedures when raising invoices. Invoice finance companies monitor the level of credit notes uploaded and the dilution of the debt to ensure that an agency is not raising ‘fresh-air invoicing’ to gain additional funds. Having a robust invoicing process to ensure that credit notes are minimised and having clear explanations as to why these are raised are important to ensure continued maximum funding.

Ensure Clients Pay Within the Funding Period and Debtor Day Targets

Invoice finance facilities are in place to fund the period from when the contractors are paid until the client makes payment. However, these facilities cannot lend funds for an infinite period and will often impose funding period of between 90-120 days from the invoice date. Any invoice that goes over these time periods and remains unpaid will not be funded, but of course the funds are still due to the agency. Invoice finance companies may also impose debtor day targets in the hope that the credit controllers will try and get as many funds in as possible, reducing the risk of invoices reaching the end of the funding period.

If Making International Placements, Ensure the Country Can Be Funded

Agencies making international contract placements can also get funding from invoice finance companies, but this needs to be arranged in advance of making the actual placements. Not all invoice finance companies can provide finance to countries outside of the UK and if they do, it’s likely that they will have some restrictions on the countries they can fund. Some invoice finance companies may also not be able to provide the funding in the currency required.

If Making Placements Under Cis, Register as “Gross Status” as Soon as Possible

Agencies working in the construction sector making trades and labour placements should be aware of the Construction Industry Scheme (CIS) and its impact on funds being received from the clients due to the deductions made. If an agency is not registered as “Gross Status” under CIS, it will have 20% deducted by the client from any invoice paid and therefore when an invoice finance company provides funding they may reduce the prepayment by a further 20% (i.e. 90% funding will go down to 70% funding) as the client will not pay the full invoice value. It is important to become registered as soon as possible to avoid any reduction in funding during this time.

Manage Your Monthly Reconciliations Submissions

If your invoice finance arrangement is on an invoice discounting facility then each month it is expected for the agency to provide a reconciliation to ensure that the balance held by the invoice finance company matches the Aged Debtor Report held by the agency. Using this reconciliation, the invoice finance company will assess whether there should be any reduction in the funding levels due to concentration levels, credit limits, effects of credit notes. However, these reconciliations will often need to be submitted within 15 days of the end of each month so it is important to assess whether these should be submitted on the 15th (if there will be restrictions on funding) or if it should be submitted on the 1st (if it will release earlier funding restrictions).

Speak to Your Account Manager Regularly

When an invoice finance company set up a facility, they provide each company with an account manager who will be on-hand to ensure that the facility provides the funding levels laid out in the invoice finance agreement. However, the account manager is also available to ensure that any future needs are met and adapt the facility to ensure there are no restrictions in funding. By keeping in regular contact with your account manager and having a good relationship with them, this can ensure that there is always the required funding available.
TBOS works with various invoice finance providers and manages the day-to-day administration of the facilities for the recruitment agencies we manage. As part of the service managed by TBOS, we ensure that the agencies have the maximum amount of funding by monitoring the funding and credit limits, reduce credit notes, collecting funds and liaise with the account managers. At all times we communicate with the agency directors so they are aware of any potential pitfalls that may occur in the future and keep them updated on any restrictions on their facility.
For more ways on how TBOS can review your existing invoice finance arrangement, please contact our office.