Types of Invoice Finance For Recruitment Agencies

For both temporary/contract and permanent recruitment agencies, cash flow worries are a common concern. Recruitment and employment costs frequently have to be paid before a penny is seen from customers, leaving a challenge to balance income and expenditure – let alone plan for growth. Invoice finance is a common solution to temporary cash flow management in many sectors, but unfortunately most financial instruments are geared towards ‘product-based’ supply industries and are not always tailored to the demands of staffing costs.

If you are a recruitment agency that has struggled to find an invoice finance provider that fits with the needs of your business, TBOS is in a position to help. We provide a range of Invoice Finance strategies tailored to the recruitment sector. Like all invoice finance products, those we source for recruitment clients involve releasing capital from unpaid invoices. But as we are about to show, it pays to compare invoice finance providers.

Invoice financing comes in many shapes and sizes and goes by a variety of names, which people use interchangeably. However, as with other types of financing, the devil is in the detail. Here are the main types of invoice financing you’re likely to come across in the recruitment industry:

Invoice Discounting

1) Invoice discounting (ID). This is when the financier unlocks most of the value of your unpaid invoices (usually up to 90%) right away. After this it is your responsibility to perform credit control, liaise with your client, arrange payment to the lender, and settle the invoice. After the financier receives the payment in full, you receive the rest of your balance, minus a commission. With invoice discounting, you could say you’re using your unpaid invoices as collateral for a secured loan and leveraging the value of your sales ledger.

2) Confidential invoice discounting (CID). Like standard invoice discounting, CID involves receiving an advance capital against your invoice before the client settles it. The difference here is that your financier’s involvement is confidential – i.e. your customers don’t have to know that you’re dealing with an invoice finance company (thousands of companies do it but there is still a taboo about dealing with third party credit agencies among some businesses).

TBOS opinion: In most cases, invoice discounting is the most suitable invoice finance solution for recruitment businesses and is the one we recommend for our clients. It is usually the most straightforward form of invoice finance to arrange and, crucially, gives you control over customer service and credit control, as you retain ownership of your customer invoices. This is distinct from invoice factoring, which we will explain below.

Invoice Factoring

1) Invoice factoring. Factoring involves ‘selling’ or handing over your outstanding invoices to a third party (i.e. a factoring company). The financier immediately pays you most of what you are owed (minus their fee), and then seeks to recover the invoiced amount from your client. They openly carry out credit control and payment collection on your behalf, so you have to trust the lender with your customer relationship. A factoring collection team that comes across as pushy or unprofessional when collecting payments may damage your relationship with that customer.

2) Confidential Factoring. This hybrid product brings together the convenience of outsourcing credit control and having a cash advance through invoice factoring, and the confidentiality of invoice discounting. Advocates argue that you get the best of both worlds because you receive your payment in full (minus the financier’s fee), and your clients are unaware that you’ve ‘sold’ their invoices. However, many businesses are uncomfortable with the implied dishonesty in this approach, which still has the potential to undermine relationships in the recruitment industry – based as it is on trust and personal business relationships.

3) Disclosed Factoring with Back Office. Like standard invoice factoring, this approach involves handing over collection and credit control to the financier. After they’ve paid you in full (minus their fee), they openly collect the owed amount on your behalf and in their name from your clients. They may also carry out back-office tasks on your behalf, such as processing timesheets, submitting tax returns, generating invoices and payslips, presenting expense reports, etc. The type of back-office service varies across providers, based on their tech products and their clients’ requirements.

TBOS opinion: Invoice factoring was once a commonly used form of invoice finance among supplier-based businesses, where products were purchased as part of a fast-moving supply chain, and it was accepted that factoring companies would be involved in credit control. We have never found factoring to be particularly suitable for recruitment businesses, although some lenders have offered it as a finance option. Recently, however, all major banks and lenders have been pulling out of providing factoring in favour of other invoice finance strategies, such as discounting.

Next Steps

To find out more about invoice finance and the best strategies for improving your cash flow, while giving you optimal control over your relationship management, please get in touch with one of our recruitment support specialists today.

Image Source: Unsplash

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