The TBOS Quick Guide to Invoice Finance For Recruitment Agencies

Invoice Finance is the practice of ‘selling’ the debt associated with an invoice to a finance company (normally a bank) for a fee, in order to secure instant access to the funds.

Why Is Invoice Finance Being Used By Recruitment Agencies?

Contract/temp recruitment involves ‘hiring out’ workers legally employed by your agency to a company in exchange for payment for their hours worked. Invoices are issued to customers after signed and approved timesheets are received from your temps. However, the contractors normally require payment before money is received from your customer, creating a potentially problematic ‘cash flow’ for your business.

For recruitment agencies, therefore, invoice finance helps cover the costs of employing contractors, including wages and expenses paid to temps, while waiting for the customer to make payment – thus making it easier for businesses to manage their cash flow.

How Does Invoice Financing Work?

The details of invoice finance agreements vary from bank to bank, but the principal is straightforward. You issue an invoice to the buyer on your standard terms, but also forward that invoice to an invoice finance provider as soon as it is raised. The lender forwards up to 80-95% of the buyer's debt to you immediately.

The bank essentially loans you the value of the invoice (with the invoice itself providing surety for the loan), so you don’t have to wait for the customer to settle before accessing the funds. Repayments are made to the lender from your customer, and after the loaned amount is repaid, the finance company sends you the remaining balance, minus fees.

These are the main steps involved with invoice financing that UK companies must follow to make sure the transaction is above board and fair to all parties:

1) Your business provides a service to your client and an agreement is made that the price you asked for will be paid. In recruitment this involves your customers signing off timesheets to confirm the number of hours worked and the payments due for each contractor.

2) Your business issues an invoice and gives the buyer your standard credit window to complete the payment (1-120 days).

3) Under the terms of the invoice finance agreement, the invoice or batch of invoices are notified to the invoice finance company often via an online portal on the day they are raised.

4) The financing entity accepts the transaction, buys the invoice, and releases a cash advance to your business. A service fee is taken immediately, and interest is charged on a daily basis on the amount borrowed.

5) When the buyer's payment is made in full, the financer returns the remainder, minus interest.

Types Of Invoice Finance

Invoice finance goes by many names: invoice factoring, accounts receivable financing, invoice discounting, and spot factoring, and there is no shortage of banks and finance companies that offer invoice finance services (we do most of our business through Metrobank and Santander). Some ‘full’ invoice finance deals involve selling all your invoices to a funding partner, while other ‘spot finance’ agreements allow you to pick and choose which invoices you forward for finance.

Is Invoice Finance Right For Your Recruitment Agency?

Invoice finance is often a cheaper cash flow management solution than using an overdraft or commercial loan. However,  there are some disadvantages that may make these solutions unsuitable for your company:

  • Financing fees can add up, so it might be worth resorting to invoice finance only when you deal with buyers who tend to pay up later rather than sooner.
  • Financing companies can lock a business into a long contract and force it to commit a certain volume of invoices or even the entire ledger. However, TBOS operates on a rolling contract with a 28-day notice period.
  • Handing over credit control is a double-edged sword. Allowing the financer to collect payment can damage your business relationships and alienate buyers, so be sure to align with a finance company with a similar credit control policy to your own.
  • As with any business agreement, there's the potential for "hidden" fees. Some invoice financing UK companies charge an initial one-time fee, and some establish added fees based on the volume of business. At TBOS, we base our set-up fee on projected turnover and set our service charge at only 0.25% to 0.4%.

Next Steps

Cash flow management in the recruitment sector is a notorious balancing act, with many temporary workers paid weekly or by assignments, and customers paying monthly or quarterly! Reduce your credit fees and take control of your cash flow with one of our flexible invoice finance arrangements designed for recruitment businesses. To find out more and discover how much you’ll save, please get in touch today.

Image Source: Pexels


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