When a recruitment agency begins to make contract and temporary placements there is often a requirement for the agency to have some sort of funding arrangement in place. This type of funding is usually provided by Pay And Bill companies, this ensures the candidate is paid before their client pays for their recruitment services.
Although there are many funding solutions available for recruitment agencies, one that is most popular in the industry is Pay And Bill companies. This type of funding provider will often raise the client invoice based on a signed timesheet, pay the contractor from their business bank account and distribute the profit – minus their charges to the agency bank account the same week.
Given there is a demand for this type of solution amongst new start ups and agencies placing contract and temps, TBOS will explain the main pitfalls of using this type of solution for your recruitment business.
PAY AND BILL COMPANIES FEES CAN BE 20% HIGHER THAN THEY APPEAR
As the fees charged by Pay And Bill companies are often based on a set percentage on the full invoice value including VAT then the actual fee to the company is inflated by an additional 20%. This means that a 4% charge can rise to a 5% charge. However, if the Pay-And-Bill company only charges on the net invoice value or if you are making international placements (where VAT is not charged) then the percentage charged is the same.
PENALTIES FOR MISSING TIMESHEET DEADLINES
Often Pay-And-Bill companies will have set days that they raise the invoices and pay the contractors which means that the timesheets must be uploaded and/or approved by a certain day each week (usually Tuesday) and the contractors are paid on the Friday. This means you have no say over this process and god forbid your candidates submit their timesheets late, then your candidate will not be paid until the following week. Often the only way to ensure they are still paid is to pay a penalty charge per contractor to ensure that the contractor is still paid by the Friday.
NOT ALWAYS 100% FUNDING WITH PAY AND BILL COMPANIES
Some Pay-And-Bill companies profess that they provide the agency with 100% funding but in truth if your contractors are being paid PAYE then the percentage is often much lower. This is due to the Pay-And-Bill company holding the VAT, PAYE, holiday pay and pension money in their business bank account until they are due to HMRC, the pension provider or the contractor. If you were processing these candidates through your own invoice finance facility then you could reduce your funding charges significantly. This is because you would not be borrowing as much or you could hold these funds in your own business bank account.
BECOME RELIANT ON ADVANCED PROFITS
As Pay-And-Bill companies often pay the profits based on when the timesheets are approved instead of once the client makes payment, it can be hard to imagine transitioning to your own invoice finance arrangement when they provide only 85-90% of the invoice value. However, getting these profits in advance comes at a costly price as you are paying a premium charge to have these profits before they are due. Consequently, you become stuck in a cycle of relying on these in order to run your business each week.
RECRUITMENT AGENCY CAN LOSE THEIR IDENTITY ON PLACEMENTS
When you process contractors through a Pay-And-Bill provider your clients and candidates are aware of your external funding solution. This means the Pay-And-Bill company will be a party on the contract process, placed on headed paper for client invoices and the payments to the contractors will come from the Pay-And-Bill company bank account. Even if the Pay-And-Bill company are not part of the contract or invoicing process they will often have their details on the invoice payment details and chase the funds under their name revealing their involvement to your client.
FUNDING COSTS CAN BE MUCH HIGHER THAN HAVING YOUR OWN INVOICE FINANCE FACILITY
As the Pay-And-Bill company are using their own systems and funding your placements they can set their own fees and charges to your agency. Often the Pay-And-Bill provider will have external funding from a bank or investment house at a lower cost, whatever they charge your agency will turn a profit for themselves. On the other hand, if you decided to go directly to a bank or factoring company to set up your own invoice finance facility then you cut out the middle man. This often leads to a significant saving on your funding costs compared to using the Pay-And-Bill company. Your own invoice finance charges can be as little as 1-2% compared to a higher rate of 4-6% charged by a Pay-And-Bill company.
HOW TBOS CAN HELP
TBOS offers two back-office solutions to recruitment agencies looking for funding and administration for their contract placements.
TBOS Freedom is a Pay-And-Bill solution with a difference:
Although we are part of the contract, invoicing and payment process we do not charge based on a percentage of invoice value. We pay candidates daily and we do not distribute the profit immediately (only once the client pays) to keep the facility costs low.
TBOS – Profit Calculator
TBOS Complete on the other hand is a full back office and accountancy solution for recruitment agencies:
With this solution TBOS helps the agency to arrange their own invoice finance arrangement using our large panel of invoice finance lenders. Once the arrangement is negotiated and set up, TBOS then looks after the daily management of the facility to ensure the funding is maximised and the costs remain low. The main benefit of TBOS’s involvement in this back-office process delivers a huge saving on funding rates, this is because our panel of invoice finance providers assess the minimised risk on the debt and deliver lower rates because TBOS is looking after the complete administration side of the recruitment business.