When Did You Last Review Your Invoice Finance Arrangement?

Invoice Finance is an important part of any recruitment agency providing contract and temporary placements as it provides funds to pay the candidates before the client makes payment.  Invoice Finance companies love recruitment agencies as they know that the invoices raised are virtually guaranteed to be paid as they are based on signed contracts and authorised timesheets.  However ensuring that the invoice finance arrangement works for your agency means that you need to review these on a regular basis to ensure that it is meeting your needs now and in the future so as to not be overcharged.

Below is a list of when you should be reviewing your invoice finance arrangement and some examples of what TBOS has done for some of its clients in these circumstances which have resulted in cost savings and increased cash-flow:-

  • NOT REVIEWED IN LAST 12 MONTHS
    When an invoice finance company signs up an agreement they are basing their charges on the next 12 months projections. After the 12 month period these can either be lower or higher than expected and as such you could continue to pay a higher charge than expected (if the turnover is lower, you could be stung by minimum fees or if the turnover is higher you could be on a higher service charge).  We would suggest that after the 12 month sign up period you review your projections for the next 12 months and see if the invoice finance company will renegotiate the fee down.

TBOS EXAMPLE – TBOS recently helped negotiate a deal for a new client who had been on the same service charge of 1% for 3 years.  As their turnover had grown to over £4m during that time and was continuing to grow we negotiated a decrease in service charge to 0.43% saving them over £27k immediately.

  • RAPID INCREASE IN TURNOVER
    When creating the projections for an agency it is important to be as accurate as possible and to have an element of caution so as to not over project and pay high minimum fees.  However, projections are never an accurate science and if a client suddenly provides a large number of unexpected contractors then the invoicing totals can increase and you could be paying a higher service charge fee than you should.  We would suggest that if the turnover is going to dramatically increase before the 12 month period then speak to the invoice finance provider about reducing the rate if you sign up for an additional 12 month period and in most cases they would be happy to oblige.

TBOS EXAMPLE – TBOS helped to set up an invoice finance facility for an agency with projected turnover of £850k in its first year so the service charge was set at 1.5%.  Within 9 months they had exceeded £1m turnover and were projecting to grow to £2.4m within 12 months.  TBOS negotiated a new deal at 1.15% with the same invoice finance agreement as long as they signed for a further 12 months.  This saved them initially £3,500 but grew to a saving of £10,000 once they hit £2.4m turnover.

  • PERMANENT FUNDING TO GET YOU OUT OF A CASH-FLOW HOLE
    Invoice finance companies are always happy to provide funding against contractor invoices as a prepayment of around 95-90% as every invoice that is raised has an authorised timesheet virtually guaranteeing payment.  If following this solution an agency is still strapped for cash it can be hard to get alternative finance from a bank as the assets of the company are already allocated to the invoice finance provider.  If this is the case it may be a good idea to approach the invoice finance company to see if they will provide funding on the permanent invoicing to provide that additional cash-flow requirement.  If you have a strong contract book then invoice finance providers should be able to leverage funding at a prepayment of around 60-65% of each permanent invoice.

TBOS EXAMPLE – TBOS took on an agency who had been regularly struggling to keep up with its HMRC payments for a number of years and could not raise additional funding as the contract debt was invoice financed.  TBOS moved the invoice finance to an alternative provider who agreed to provide funding on the permanent invoicing as long as the HMRC debts were paid using the funds.  This gave the agency additional on-going cash-flow of around £20k to fund the growth plus saved on service fees charged as the turnover increased due to including the permanent invoicing on the projections.

  • MINIMUM FEES KICKING IN EACH MONTH/QUARTER
    Every agency hopes that when they produce projections on their business they will exceed them to make the profits they want to generate. This also works for invoice finance projections to ensure that the business will exceed the projections to ensure that any monthly/quarterly minimum fees will be exceeded.  However, this is not always the case and although invoice finance companies give a fighting chance of setting the minimum fees to around 80% of projected turnover this can be hard to meet if the contractor numbers do not come through.  If you notice on your end of month statement that you are being charged the minimum fee it is advisable to speak to your invoice finance provider to see if they can defer the fees or review the arrangement to reduce the minimum fees.  In some cases it may be an idea to see about moving provider or exiting completely.

TBOS EXAMPLE – TBOS has had a few examples over the years where invoice finance has been set up and the agency has not performed to the required level.  TBOS has worked with the agency and the invoice finance provider to end the agreement and move them to our TBOS Freedom model where there are no minimum fees.  This is on the proviso that once they get back to the required turnover that the invoice finance company will get them back as a client in the future.

  • NOT SATISFIED WITH THE CREDIT CONTROL
    Having the funding from the invoice finance facility to pay your contractors is not the only important part of having these arrangements in place- getting the funds in from the clients is also vital to ensure the cash-flow of your agency.  If you have a factoring facility where the invoice finance company chases your debts you have to assess if this is working the best way for your agency as their chasing/dunning cycles may not be what you expect.  Factoring companies will often not chase your debts until the invoices are 7 days overdue which can mean you are charged additional interest fees and in some cases refactoring charges when the debts become too overdue.  Reviewing your debtors with the invoice finance company is important and if it is not working then moving the credit control in-house may save you more money in the long run than paying these additional charges to the invoice finance company.

TBOS EXAMPLE – TBOS always looks after the credit control for all of the agencies we manage.  Our dunning cycle is to verify debts within 7 days from when the invoice is sent to ensure the invoices are received, correct and will be paid on the next payment run.  TBOS has greatly reduced the debtor days of agencies we have moved away from invoice finance companies and on one client we reduced the refactoring charges from over £3,500 per annum down to £200 per annum… much to the invoice finance company’s disappointment!

TBOS helps its agencies to review and monitor their invoice finance arrangements on a regular basis to ensure they are providing the correct amount of funding at the best possible price.  TBOS can go to its panel of invoice finance providers to ensure that prices are competitive and ensure that if additional funding is required it can be a sourced from reputable parties.  TBOS also manages the day to day running of the facilities to continuously ensure that the maximum amount of funds are available and additional charges are kept to a minimum.

If you would like TBOS to review your current invoice finance arrangements or even help to set up your first invoice finance arrangement please do not hesitate to contact our office.