The Invoice Finance Company Said No – But Why?

Invoice finance is fairly standard within the recruitment industry for agencies that make contract placements and want to bridge the funding gap.  The recruitment market, specifically contractor placements, are considered less risky in terms of funding as each invoice should have a signed timesheet attached; this should mean that each invoice is virtually guaranteed for payment.  This allows the invoice finance companies to provide 80-90% finance against these invoices with little risk to themselves and the agency.  Almost unique to the recruitment market, invoice finance companies are willing to help new start up agencies by providing facilities based on their projected turnover and potential client list as long as they can demonstrate that they can meet the targets set.

We have explored some of the reasons why invoice finance providers might not be willing to provide funding to new start up recruitment agencies:-

  • Contract Turnover Below £500k
    Most invoice finance providers will not provide an arrangement if the projected contract turnover is below £500k. This is mainly because the fees/ charges on such a small amount of funding, and the time taken to get the arrangement in place will not be enough to cover the minimum fees on the arrangement.  There are some providers who will still provide a facility for such a small turnover, but the fees and charges will often be at very high rates, with high minimum fees and set up costs.
  • Concentration Of Debt With One Client
    Invoice finance providers do not like when a facility has a large concentration of debt with one or two main clients, and will often put restrictions within the facility documents to ensure that this cannot be the case. Restrictions may include capping the funding limit for these clients or reducing the prepayment percentage. Any concentration of debt with one client can be seen as a risk should the client go bust or the if the client severs business ties with the agency.
  • No Experience In The Recruitment Market
    Something that an invoice finance provider will look into as part of their due diligence is the experience of the Director within the recruitment market – or sometimes the lack thereof! If the Director has not worked as a recruiter or cannot demonstrate that they have sufficient experience within the sector, this can make an invoice finance provider nervous about the agency meeting their projected turnover figures or not fully understanding the compliance associated with making placements.
  • Contractors Are Working In A Risky Industry
    Some invoice finance companies have aversions to certain industries which they may deem to be riskier than others. Industries such as retail and construction have recently been in the spotlight due to Carillion, Maplin and Toys R Us going bust and may mean that some providers may not want to provide a facility to an agency making placements in these sectors.
  • Concentration Of Overseas Debt
    Not only do invoice finance companies have an issue with concentration of debt with one or two clients, but if the concentration of debt is outside of the UK then this can also be a sticking point. Not all providers can provide finance on currency or international debtors and if these export clients make up a large portion of the debt, there may be restrictions on the funding.
  • Directors Have Bad Credit Rating
    Whilst the invoice finance arrangements are mainly based on the credit worthiness of the clients invoiced, the finance provider will also want to ensure that the Directors of the company have a good credit rating without any outstanding CCJ’s, defaults or banned directorships. They may also want to review any existing or previous companies the Directors have been involved with before providing a facility to ensure there is no conflict with their agreements.
  • Client Base Includes Pay-When-Paid Contracts
    Pay-When-Paid contracts are seen as a large risk for invoice finance companies as the debt that is funded cannot be pursued as the client can simply say “we haven’t been paid by the end client”. This means that RPO contracts and consultancy agreements may be excluded from the funding, unless the invoice finance provider is happy with the invoicing process and that both the end client and the invoiced party have a good credit rating.

Here at TBOS, we manage the day-to-day operations of many invoice finance arrangements for our clients.  Many of the invoice finance arrangements have been introduced and set up by TBOS using our list of preferred suppliers to ensure that the agency is provided with maximum funds on a facility which matches their needs.  Should any agency be identified as not meeting the criteria for having its own invoice finance arrangement then TBOS will make the recommendation to use our TBOS Freedom model instead. This provides contracts, invoicing and funding on a pay-as-you-go basis until the agency meets the requirements set.  This incubator model allows the agency to still enjoy the benefits of placing candidates and building a strong relationship with their contract clients, without being bogged down by funding or administration issues.

For more information on how TBOS can help set up and manage your own invoice finance facility for your recruitment agency, please contact our office.