Contractor/Temporary Recruitment: Pay-And-Bill or Invoice Finance?

Recruitment agencies making contract/temporary placements, especially for the first time, will often have to decide on how to fund the placements as their clients will pay on 30/45/60/90 day payment terms but candidates will expect to be paid on 7-14 day payment terms.  This means the agency have a funding gap that needs to be filled either with their own company funds or from an external source.  Most agencies will look to use either a Pay-And-Bill company or decide to set up an invoice finance arrangement depending on their requirements.

Deciding on which method to use can be confusing as there are many factors that need to be considered to ensure you are not paying excessive fees or signing up for a long-term agreement which isn’t necessary.  Below are some questions you should ask before deciding on which type of company to use to finance your contractor payments:-

  1. Is The Projected Turnover of The Contractor/Temporary Placements Above &Pound;500k Per Annum?
    The simple way to see if invoice finance is a better option than using a Pay-And-Bill company is whether the projected turnover on the contractor/temporary placements is going to exceed £500k. If the projected turnover is anticipated to be less than £500k then the minimum fees on the service charges from an invoice finance company may be more expensive than using a Pay-And-Bill provider.  However, if the turnover is going to exceed £500k then the service charges will often be much less with invoice finance than a Pay-And-Bill company’s charges.
  2. Are The Contractor/Temporary Placements Longer Than 12 Months?
    Pay-And-Bill arrangements can be advantageous because you are not bound by a long-term contract and can decide on which contractors/temporary workers you want to fund. Invoice finance companies usually have 12-month contracts with 3-month notice periods, meaning you need to ensure that you have enough contract turnover to go beyond 12 months or you could end up with high exit fees.  However, there has recently been a change with some invoice finance companies whereby they now offer rolling contracts with 1-month notice periods.
  3. Do You Need The Finance Immediately?
    Often a contract/temporary placement can be made quicker than anticipated and it then becomes a race against time to secure the finance before the candidate needs to be paid. As invoice finance companies have to underwrite their facilities, they will have to create and present a credit file before they can sanction a new facility.  This whole process can take 3-5 weeks to get in place before funds can be available whereas Pay-And-Bill companies do not have such stringent rules and can usually turn a deal around within 24-48 hours.
  4. Do You Need the Profit Immediately Each Time a Timesheet is Received?
    The cash-flow situation of the agency will also have a bearing on whether to use a Pay-And-Bill company or an invoice finance arrangement. Pay-And-Bill companies will often provide the profit generated on a placement (minus their fee) at the same time as paying the contractors.  However, some Pay-and-Bill providers will withhold the VAT and/or PAYE elements in their account, which can mean they are not providing 100% finance.  Invoice Finance companies on the other hand will provide 75-90% of the invoice value up front as a prepayment for the agency to manage in their own bank account with the remainder becoming available once the client makes payment.
  5. Could You Manage The Back Office Administration Internally?
    One advantage that agencies may find with a Pay-And-Bill company is that they will look after the invoicing, payroll and payments of the contract/temporary placements each week/month as part of their charges. However, this does depend on the company you use as some will get the agency to collect the timesheets and upload the data on a weekly basis, which can seem like an expensive option as it distracts the agency from making placements.  If you use an invoice finance company, then the admin (invoicing, payroll and payments) needs to be completed internally at the agencies cost using the invoice finance portal to release funds.

The disappointing part of the process when looking for the right provider and service is that there is very little independent advice available for recruitment agencies; with the many different Pay-And-Bill providers and invoice finance companies all trying to onboard you, it can often be a minefield on knowing which one to choose.  Also, once you have chosen a company it is advisable to review the effectiveness and pricing of the facility on a regular basis as it is often the case that your current provider will not recommend moving or reducing their pricing.

TBOS has many years’ experience of helping recruitment agencies in setting up and managing their invoice finance facilities to meet their contractor funding requirements.  TBOS works with many different invoice finance providers to ensure that the pricing and service is the best for the agency and ensures that this is reviewed on a regular basis to ensure that the agency is not over charged.  For new agencies, TBOS will review whether the agency needs their own invoice finance facility or advise them to use our TBOS Freedom facility which acts as an incubator solution until an agency gets to the required level of turnover to make their own facility worthwhile.  If an agency using TBOS Freedom gets to the required level of contractor turnover then we will help the agency transfer to their own facility in a seamless way to ensure continuity of service for their clients and contractors.

For more information on how TBOS can help when it comes to invoice finance arrangements, please contact our office.