Many different invoice finance solutions have evolved throughout the years – specifically for the recruitment sector as there is a growing demand for paying candidates ahead of their clients making payment. These types of solutions have been divided into invoice factoring and invoice discounting, with the rates of these solutions dependent on the agency’s size and its level of risk on repayment.
As an alternative, many recruitment businesses have decided to use their own funds or obtain a Pay-And-Bill solution to pay contractors in advance. However, this comes with its own pitfalls on the recruitment business succeeding long-term, and in some cases, it makes more financial sense to acquire their own invoice finance arrangement.
Here TBOS lists different occasions when a recruitment agency should look at obtaining their own invoice finance arrangement:
IF YOU ARE PREDICTING OVER £500k IN TURNOVER IN YOUR FIRST YEAR
One of the big misconceptions about invoice finance is that it is only available to existing agencies with a track history and not viable for new start-ups. This is not necessarily true, if your projected turnover for the first year is in excess of £500k and you have a solid client base with many years’ experience in the recruitment market but also have a strong back office team behind you, then an invoice finance company can provide a funding facility from day 1.
WHEN YOU ARE MAKING HIGH VALUE CONTRACT PLACEMENTS WITH CLIENTS
If you are making high level long-term contract placements (i.e. £300 per day+) then obtaining your own invoice finance arrangement is a much cheaper option than running your business through a Pay-And-Bill company. This is because the the lending rates are much lower than the average 4% percentage Pay-And-Bill companies tend to charge, which will make a significant difference to your profit margins.
WHEN YOU ARE BEING RESTRICTED BY A PAY-AND-BILL COMPANIES RULES
When working with a Pay-And-Bill company you may find you are restricted by their rules, such as fixed client payment terms (often 30 days) or that they only fund clients who have credit limits. These restrictions can mean that you have to turn down business from clients. However, with Invoice finance companies you can often fund invoices up to 120 days. They can also take a view on non-credit insured clients and may allow these to be funded even if the client hasn’t got the best credit rating (at your own risk).
WHEN YOU ARE PAYING CONTRACTORS FROM YOUR OWN MONEY
If you are making temporary or contract placements but using your own company funds to pay them, you may find that this restricts the growth of your agency. As your funds are tied up with paying the contractors this may stop you from taking on more staff, making systems and office improvements or even restrict you further should your contractor numbers increase. Although there is a cost saving to be made by funding this yourself the cost of invoice finance is not as expensive as it may appear.
WHEN YOU NO LONGER NEED PROFITS IN ADVANCE
If your agency no longer needs to acquire funds in advance from a Pay-And-Bill company then you should immediately stop paying a premium rate to facilitate this. Many invoice finance companies will lend you up to 90% of an invoice value with you only having to pay interest on the funds borrowed. This can reduce your funding costs significantly compared to running your business through a Pay-And-Bill provider.
WHEN YOUR BACK-OFFICE TEAM LOOKS AFTER THE CONTRACTOR PROCESS
If you have an internal team or an outsourced back-office provider to look after your contract placement processes then its highly recommended you use your own invoice finance arrangement instead. If you can demonstrate that your back-office team can look after the invoicing, credit control and payroll plus provide management accounts then you should be able to convince the invoice finance company to provide you with an invoice discount facility, which will dramatically reduce any funding costs.
HOW TBOS CAN HELP
TBOS have helped many contract recruitment agencies to set up and manage their own invoice finance arrangements with our panel of recommended funding providers. These funding arrangements are delivered at a preferential rate to TBOS because we manage the day-to-day administration on the solution and also provide monthly management reporting.
TBOS have had a lot of success at reviewing our many different clients funding situations, whether they are self-funded, using a Pay-And-Bill solution or negotiating a better invoice finance rate compared to their current invoice finance facility. We have also helped many agencies receive funding on international placements to over 170+ countries within 15 different currencies – which can be a common restriction from their previous funding facility.