Within the recruitment market, invoice finance facilities are commonly associated with funding contract and temporary placements as there is a requirement to pay candidates before the clients make payment for the associated invoices. However, due to cash-flow demands and business growth plans, there are a number of agencies who consider using invoice finance to fund their permanent placements. Whilst there appears to be an advantage to using this type of funding, there are some things to take into consideration before deciding if this really is the best option for your agency:-
- Funding Percentage Is Much Lower
As permanent placements are based on a fee for a person starting on a permanent basis, with the possibility of the candidate leaving during a rebate period, the invoice finance companies providing finance will often provide funding at a lower level than a contract/temporary placement. Instead of the normal 85-90% prepayment on contract/temporary placements, permanent funding will often be set between 60-75% depending on the industry, payment terms and rebate periods.
- Service Fees Are Much Higher
As the turnover on perm-only recruitment agencies can potentially be much lower than contract/temporary agencies and there is a higher risk of a credit note being raised due to rebate periods, the service fees charged by invoice finance providers will often be much higher than normal. Rates of between 2.5%-5% of turnover on permanent placements compared to 0.3%-1.75% of turnover on contract/temporary placements are normal practice with these types of facilities.
- Limited Invoice Finance Providers
Whereas nearly all invoice finance providers would be happy to provide finance to a contract/temporary recruitment agency (due to the security of signed timesheets), the number of funders who will provide a perm-only finance arrangement are limited and somewhat rare. Many providers may be able to provide permanent funding alongside a contract/temporary ledger but not on permanent placements only.
- Overall Benefit May Be Minimal at a High Cost
When an agency uses invoice finance to fund its contract/temporary placements there is a requirement to pay a candidate, however when funding is borrowed on permanent invoicing there is a minimal cash-flow gain for a large cost. If your agency billed £20,000 per month and received 75% funding at 3% of turnover, the net cash-flow gain would be £15,000 per month at a cost of £600 per month. If this continues for 12 months then for a gain of £15,000 per month, it would cost £7,200 per annum which is the equivalent of a 48% interest rate.
TBOS manages many different types of invoices finance arrangements with various providers for the agencies we look after. These facilities have been set up to meet the agencies cash requirements, usually to pay the contractors/temporary placements, although some also include funding on their permanent placements to aid growth plans. TBOS works with a number of invoice finance providers to fund perm-only agencies, although we do try to reduce the need for this by ensuring that the credit control processes are robust and the agencies cash-flow is managed correctly. For more information on how TBOS can help set up and manage an invoice finance facility for your agency, please contact our office.