CONTRACTOR FUNDING: PAY-AND-BILL VS INVOICE FINANCE

Contract recruitment can be a very lucrative way of an agency generating profit for a consistent period, especially if they build up a base of candidates on-site where the agency is paid for every hour/day worked during the contract. However, the agency needs to ensure that there is sufficient cash flow to pay the candidate before the client makes payment.

Most recruitment agencies will look for mechanisms on the market that can bridge that gap, and two of the main services available are Pay-And-Bill or Invoice Finance (Factoring or Invoice Discounting):-

Before we get into the pros and cons of each solution, here is an explanation of each service offering:-

PAY-AND-BILL

A Pay-and-Bill solution is where a provider will raise the client invoices based on a signed timesheet, they pay the candidate from their business bank account and distribute the profit element to the agency minus their charges (often a percentage of the invoice value). This solution is often favoured by temp recruitment agencies or agencies with a small contract book.

INVOICE FINANCE

Invoice Finance is provided by banks and invoice finance companies. It is where they fund a percentage of the agency debtor book (often between 75-90%) with the remaining amount made available once the client makes payment. The funding is provided to the agency bank account where the agency will make payments to the candidates directly. This facility is charged on a small percentage of the invoice value and a minimal interest rate on funds borrowed. This type of solution is often favoured by agencies with a large temp book or a high-level contract recruitment agency.

Both of these solutions have financial and operational differences between them and agencies may start on a Pay-And-Bill solution and later move to an invoice finance arrangement. Other agencies, however, may go straight into using an invoice finance solution from day one.

Based on our experience of both models here are our pros and cons of the two solutions:-

PAY-AND-BILL CHARGES ARE OFTEN MUCH HIGHER FOR CONTRACT AGENCIES

As Pay-And-Bill companies will charge you a percentage of your invoice value (some with and some without VAT) this can work well on temp placements where the invoices are low value. As a high-level contract recruiter, if you are charging your client £400 per day and being charged 4% of the full invoice value, then you may be charged nearly £100 per week which could be one days profit. However, invoice finance facilities normally start from around 1.75-1% of invoice value with a small interest rate on funds borrowed this fee may be much smaller.

INVOICE FINANCE FACILITIES CAN TAKE 3-5 WEEKS TO SET UP

As an invoice finance facility requires the provider to fund on your debtor book, there is much more compliance and legislation involved in setting up a deal. This would involve submission to a credit committee, checking your HMRC position and signing of legal documents. However, a Pay-And-Bill facility can be set up within a matter of days in comparison as they only need to check the contracts and creditworthiness of the clients to start providing funding against these placements.

YOU CAN LOSE CONTROL OF YOUR PLACEMENT THROUGH A PAY-AND-BILL COMPANY

As the Pay-And-Bill company are paying your candidates and profits each week, they will often want to have full control of the placement. This will mean the invoices will have some notification that they are involved; the candidate will see the funds are from the Pay-And-Bill company, and the agency will have to stick to strict submission deadlines each week. However, if you manage to secure a confidential invoice finance facility then the client will not be aware that the placement is being funded, the candidate is paid from the agency bank account, and the invoice finance company can provide funds on a daily basis which makes it easy to manage late timesheets.

YOU NEED TO HAVE A ROBUST BACK OFFICE WHEN USING INVOICE FINANCE

When you have your own invoice finance arrangement, you will often need to have a strong back office team to ensure that the facility works well. This is because the agency will have to raise their own invoices and pay their own candidates plus do an element of reconciliation work daily. However, when you use a Pay-And-Bill company all of this is handled by them, so as long as the agency provides the placement data, then the large majority of the work can be done by the Pay-And-Bill provider.

THE PAY-AND-BILL COMPANY MAY HOLD BACK YOUR VAT AND PAYE

A large portion of Pay-And-Bill companies will advertise that they are providing “100% funding” to an agency, but we have found that many providers will often hold back the VAT and/or PAYE element of a placement until this is due to HMRC. In some circumstances, this may mean they are only actually providing 65% funding instead of the full 100%. At least with an invoice finance provider, you will often get the full agreed prepayment as long as the client is creditworthy and you can hold the VAT and PAYE funds in the agency bank account.

Both of these solutions have a place in the recruitment market and allow agencies to place contractors and temps for their clients. However, agencies should review their funding solutions regularly to ensure that they are providing the maximum funds available and are being charged correctly based on their agency turnover and growth.

TBOS has helped set up and manages over 50+ invoice finance arrangements spread over ten different providers. TBOS helps to manage the day-to-day running of these facilities and ensures they are periodically reviewed so that the funds are maximised, and the fees are in-line with the agencies growth. Please contact our office if you would like further information on how we can help your agency.

 

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