Invoice finance is often a requirement for agencies making contract or temporary placements as there is a requirement to pay the candidate before being paid by the client. With that said, some agencies may also decide to use this type of finance for funding permanent placements. This is to aid the company cash-flow, pay staff or cover certain overheads before the invoice is paid by the client.
Based on the fact that a permanent placement is dependent on the candidate starting and staying within the position and can be subject to a rebate scheme this means that the invoice finance company may only lend 60-75% of the invoice value, instead of 85-90% on contract placements.
One of the main pitfalls however is that this type of funding permanent placements may be the equivalent of an 80% interest rate over the year compared to using other types of funding.
To demonstrate this...
An agency making placements on average of £10,000 per month and has a 75% funding facility will be paying a 5% rate of each invoice value.
This means that the agency is invoicing annually £144,000 (£120,000 + VAT)
…which means the annual fee would be £7,200 (5% of £144,000)
Here at TBOS, we dissuade our clients from taking permanent funding from invoice finance companies as they charge increased fees as the agency grows and deliver little value to their cash-flow long-term.
Instead we recommend our agencies look at alternative ways to manage their cash-flow such as:
ARRANGE AN AUTHORISED BANK OVERDRAFT OR LOAN
If your bank will allow it then it would be cheaper to look at obtaining an overdraft on your company bank account or to ask the bank to provide a loan. An overdraft will have a set-up fee but you will only be charged interest on the amount of the overdraft you use. With a bank loan there is a much lower interest rate and will have scheduled repayment options for you to better manage your agency’s cash-flow.
SEE IF FAMILY OR FRIENDS CAN LEND THE COMPANY MONEY
If you have a family member or friend who has some excess cash then they may be able to lend you the required funds. You can agree to pay them a certain amount of interest on the amount borrowed and work out a repayment model to make it worthwhile for both parties. However, please note that the family member or friend will have to declare the interest received on their personal tax return.
USE COMPANY CREDIT CARDS
If you can get a company credit card then this may be a cheaper option than using invoice finance as the interest rates can be lower. You can potentially use these cards to not only pay suppliers and for expenses but also make one repayment each month and pay this in instalments if necessary.
HAVE LOW PAYMENT TERMS AND STRICT CREDIT CONTROL PROCESSES
One of the best ways to ensure that you do not need funding on your permanent placements is to ensure that the clients pay their invoices on time. If you can arrange 7 or 14-day payment terms and ensure that the invoice has been sent, confirmed and received, then it should be paid without any delays.
AVOID GIVING CLIENTS REBATES
Rebates ensure that should a candidate not work out then the client can get a replacement or be reimbursed for a portion of the fees charged. However, the rebate scheme can be a part of your negotiation with the client and it is advisable to have a clause which says that if the invoice is paid outside of the payment terms then the rebates become null and void. This should ensure the client pays on time or if they do then they will not be entitled to any rebated funds.
How Can TBOS Help You?
TBOS always tries to avoid its agencies from using an invoice finance company to provide permanent funding, but if the agency insists then there are a number of providers that we can recommend. Part of our Complete back-office solution is to manage perm invoicing and credit control processes to ensure all invoices raised and sent are correct and verified with the client. Our team also support our agency directors to manage their cash-flow needs by listening to their requirements and making recommendations where feasible to avoid outside funding.
If you would like more information on how to manage processing your permanent placements, please contact our office on 0345 504 6333