Invoice finance companies are a crucial element of the recruitment process for contract and temporary agencies, they allow agencies to pay candidates ahead of payment from their clients. With that said, it’s important for agencies to understand the restrictions of some funding companies and the implications it could have on their contractors.
Below TBOS list the issues that may cause some invoice finance companies to restrict funding:
CONCENTRATION OF A SINGLE DEBTOR
Invoice finance companies become nervous when a single client becomes a large part of a debtor book. This is just in case the debtor fails or the agency stops providing staff to them. They will also set concentration limits to deter the agency from large debtor books or they will restrict funding based when they have exceeded their limit.
Invoice finance companies do not like it when an agency signs a contract which states they do not have to make payment to them until they receive payment from their client. These types of clauses are often called a ‘Pay-When-Paid’ clause and are often seen in contracts with RPO’s (recruitment process outsourcing companies). Invoice finance companies do not like these because it could be difficult for them to collect funds on these debtors should the client not make a payment stating ‘they have not yet been paid’. Sometimes you can still receive funding if the end client and the RPO have a good credit rating however, it does depend on the invoice finance provider.
POOR CLIENT CREDIT RATING
Credit ratings are an important risk indicator to an invoice finance company. They will sometimes base their funding decisions based on a client’s current rating. These scores will be based on the clients last set of accounts, the amount of money being paid into and out of the client’s bank account and how many credit insurance claims have been made against them. It’s advisable for an agency to conduct their own credit checks before they start doing business with a new client, this should hopefully avoid any funding surprises once they have made the placement.
Not all invoice finance companies will provide international or currency finance. Their reasons for this are similar to why they sometimes don’t fund ‘concentration of a single debtor’ (mentioned above). They will also consider the level of international debtors the agency has. It’s recommended that the agency choose an invoice finance company that can provide funding for both UK and international placements to avoid any future payment issues. Additionally, they should consider bad debt/credit insurance to get the funding they require.
LACK OF BACK OFFICE AND ACCOUNTING PROCESSES
Invoice finance companies need to be reassured that the agency they are funding are doing everything in their power to minimise the risk of invoicing debt. The agency can prove this with a robust back-office operation, following strict processes and procedures regarding contracts, timesheet management, invoicing and regular bookkeeping. Any deviation from these processes can result in the invoice finance company declining funds until they see the agency back on track, or when they see fit.
FALLING BEHIND ON HMRC PAYMENTS
The funding provided by invoice finance is primarily used to pay contractors ahead of payment from their clients. It is also used to ensure agencies keep up with their liabilities to the HMRC. Invoice finance companies may put restrictions on funding if they discover agencies are falling behind on their HMRC payments, as this may put their own funding at risk.
HOW TBOS CAN HELP
TBOS have helped many of its recruitment agency clients to set up their own invoice finance arrangements. Our specialists work closely with the directors to develop an understanding of the current and future funding requirements of their agency before selecting the correct invoice finance provider from our preferred suppliers list. Our team then take care of the day to day operations of the invoice finance arrangement, following all the agreed processes and providing management accounts of payments being made to contractors and the HMRC. This ultimately reduces the risk of funding being withheld at any time from their invoice finance provider.