Invoice finance is used by many recruitment agencies to provide funding on temporary and contractor books as a way of bridging the gap between the candidate being paid (5-7 days) and the client making payment (14-90 days). Some recruitment agencies may also use invoice finance facilities to provide funding against permanent invoices to aid cash-flow. When invoice finance is used correctly it can be an invaluable way of providing the required finance to a recruitment agency but the facility needs to be managed and monitored daily to avoid any funds becoming “ineligible” for funding.
Below are a number of factors that can produce “ineligibles” on your invoice finance facility and cause you to not get the full funding that should be available:-
- Concentration Of Client Debt
Invoice finance companies don’t like putting “all of their eggs in one basket” so they will put concentration limits in place to ensure that one client does not dominate the debtor book in case that client goes bust or the agency loses the business. The concentration level can change if you make more placements with one client, if a client does not pay within terms or if your other clients make early payments. If funds are withheld due to concentration levels then it is best to speak to your relationship manager to see if the level can be increased, especially if the client in question has a good credit rating or payment history.
- Dilution Of Debt Via Credit Notes
As the funding from invoice finance companies comes from the value of the invoices uploaded, credit notes have the opposite effect as this reduces the funding available. Invoice finance companies will monitor the level of credit notes to see if there is a dilution to the debt above agreed levels. If the credit note is then replaced with another invoice i.e. an invoice is reissued at a higher/lower amount then the overall dilution is minimal. If funds are withheld, it is advisable to give a list of the credit notes raised, the new invoice raised and the reason behind them to give a more accurate picture of the dilution level.
- Client Funding Over Approved Credit Limit
If your invoice finance arrangement provides funding against approved client credit limits and the debt exceeds these limits, then you may find that funds are being withheld. In order to ensure that you do not exceed these limits, it is advisable to run credit checks prior to making the placements and ensure that you keep within the given limits. It is also advisable to monitor these limits as they can go up and down, plus some invoice finance providers can provide funding to a certain level above some credit limits depending on the concentration of debts.
- Overdue Debt Over Financing Terms
Invoice finance companies normally provide funding between 90 and 120 days from the date of the invoice, which should give the clients plenty of time to pay before the finance is retracted. It is a good idea to monitor the debtor book to ensure that clients do not start to slip into later payment terms, especially if certain clients have higher payment terms (i.e. 45-60 days). It is also a good idea to ensure that the debtor book is kept up to date and cash is allocated correctly to ensure that if an invoice has been paid it is reflected on the debtor book and does not cause funds to be withheld.
- Concentration Of Export Debt
In the same way that invoice finance companies do not like all the debts with one client, they also do not like a large portion of the debtor book to be overseas. Export debt can be seen as a risk as if the invoices aren’t paid, it can be harder to collect the debt as it can fall under debt collection rules within that country. However, if the terms of business between your agency and your client are governed under the Law of England and Wales, you shouldn’t have too much difficulty. If the debtor book is credit insured then this can make the process easier and invoice finance companies will often base the funding on the credit limit instead of the concentration of overseas debt.
- Overall Funding Over Approved Facility Limit
When the invoice finance company provide a facility, they will write the facility with an overall funding limit based on the future projections of the business. If the company grows beyond the projections and the limit is reached then the invoice finance company will withhold funds until the limit is reviewed, but this can take a few days. It is advisable to monitor the funding limit yourself and contact your relationship manager when you feel that you will get close to this limit.
- Late Monthly Invoice Finance Reconciliation
If you have an invoice discounting facility then you will be required to submit a monthly invoice finance reconciliation to prove that the debtor book on your accounting system matches the invoice finance company’s debtor book. The invoice finance company normally give you at least 15 days to provide this each month and should this be late, the invoice finance company may withhold a percentage of the prepayment allowable or even withhold further funding until submission.
- Unpaid HMRC Liabilities
As part of your agreement with the invoice finance company, they will insist that your agency keeps up with its HMRC liabilities to ensure that the funds being provided are being used correctly and that the invoice finance company’s funds are not put in jeopardy by having demands from HMRC. It is vital that you keep up with payments of PAYE, VAT and Corporation Tax and that your online HMRC account can demonstrate this should the invoice finance company ask for a statement.
TBOS has helped many recruitment agencies to set up their own invoice finance arrangements using their preferred suppliers who can provide the facilities they require. TBOS manages these facilities on a daily basis to ensure that the maximum funding is available by monitoring any ineligibles that may occur and rectifying them as quickly as possible.
For more information on how TBOS can help set up and manage your recruitment agency invoice finance facility, please contact our office.