Invoice Finance can be a minefield for any recruitment company. You must decide which method of finance you want to use – factoring or invoice discounting, and which lender – mainstream banks or a specialist factoring company. There are many things to consider when setting up invoice finance:-
- Decide on why you need invoice finance – this will form the basis of the type of funding the lender will offer you: Factoring means you will notify the factoring company of all invoices, the clients will pay to the factoring company bank account, and the factoring company will chase your debts. Invoice discounting means you will notify the invoice totals and you will have to reconcile and chase your own payments from the clients.
- Have some realistic, achievable projections – these will form the basis of your charges and minimums. Make sure you do not over-project and end up paying higher fees for a facility you don’t require.
- Have a list of your current and prospective clients – invoice finance is based on funding invoices to your clients so completing credit checks is important to see the risk to you and the lender.
- Ensure you have sorted out your own personal credit rating – nowadays invoice finance companies will not only credit check the clients you’ll be billing, but all also all director’s credit history. They may also want to see a list of personal assets and liabilities of the directors.
- Decide if you want to insure your debts – Invoice finance companies will usually offer credit insurance or bad debt protection as part of their facility but you can decide if you wish to have this included or not, as it increases the service charge.
- Ensure your margins are above the prepayment amount – invoice finance companies will lend a percentage of your invoice value (usually 75 – 90%) which should cover the amount paid to the contractor. However if your average margin is 12% and you are only being funded 85%, you will have to cover the shortfall with your own cash-flow.
- Be aware of the sign-up period – most invoice finance agreements will tie you into contracts ranging from 30 days to 24 month (though mostly 12 months), often with long notice periods and the possibility of large exit fees.
- Ensure you can cover the annual minimum fees – when an invoice finance company arranges invoice finance they will often show an annual minimum fee. This is based on your projections and if you do not meet your projections you could end up paying a higher fee.
- Ensure you are aware of all charges – some invoice finance companies have charges which may not be visible on their initial quotations. Ensure you ask about set-up costs, transfer/bank charges, software/audit fees, and annual renewal fees, to name a few.
- Take professional advice before signing – when signing the facility documents there is often a large amount of paperwork involved. Most invoice finance arrangements will include a director’s personal guarantee as part of this.
Total Back Office Solutions Ltd has extensive experience with recruitment finance and can offer help and advice to any agency on a new or existing funding arrangement.
If you don’t need a full invoice finance arrangement, but still have cash flow shortfalls, then Fund My Contractor’s specialised, short term recruitment invoice finance could be exactly what you need. Find out how it works, and then see how much profit you stand to gain with our profit calculator.