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Why recruitment companies need invoice finance

Russ Watts  •  02 August, 2021

Recruitment and invoice finance

Invoice finance is an essential tool for running a recruitment business. The business model of a typical agency, particularly those specialising in temporary placements, means they can experience severe cash flow pressure. They'll often pay their candidates every week, invoice those wages to their clients (the organisations the workers are placed with) and then they must wait an agreed period to receive payment. This means they’re constantly out of pocket.

Recruitment is a service-based industry where the commodity being sold is not stock, but someone else's skills, experience, and time. Agencies are run lean with the cost structure weighted towards paying wages. There is little money to grow, hire staff, take on new business or cover day to day costs. Therefore, some form of cash flow finance is essential.

The recruiter's cash flow gap

On average it takes about 45 days for a recruitment firm to be paid. The cash flow pressure caused by the delay between when they pay their candidates and receive payment can cause big problems. For example, opportunities to grow the business could be passed up. And unlike, for example, a manufacturer who may be able to negotiate with creditors to delay a payment, when it’s someone's wages you can’t do that.

They must pay everyone on time, week in, week out, without fail. Failing to do so can lead to temps moving agencies, cause reputational damage and ultimately put them out of business.

Furthermore, their clients are often large organisations with flexible workforces. And the larger the client, the longer they tend to take to pay invoices. Many recruitment firms are small growth-oriented businesses looking to grow their client base and staff. As they can be young companies without a financial track record, it can be hard to get a traditional bank loan.

What is invoice finance?

Invoice finance is an immediate transfer of cash delivered soon after an invoice is raised, which cuts out the waiting time between paying a candidate and getting that money back from a client. Also known in the industry as payroll funding, it allows recruitment firms to do those things they'd been previously unable to; hire more consultants, take on new business or invest in office space and infrastructure.

There are a few different types of invoice finance available to recruitment firms:

  • Payroll, invoicing and back office funding - where everything is outsourced. A third-party company takes over their entire back office whilst they focus on recruitment. An expensive option, but with the fees paid they get 100% of the funds owed.
  • Invoice factoring - this is where their invoice ledger is sold to a third party. Credit control is often outsourced to the lender who takes responsibility for chasing the payment, meaning that the facility is disclosed to clients.
  • Invoice discounting - an often confidential arrangement where the invoices are used as security for a loan rather than being sold to a lender. It often takes the form of a line of credit that the lender can draw on again and again. Typically, they can access up to 80% of the funds owed.

Benefits of invoice finance for recruiters

Invoice finance can immediately free recruiters from the pressure of payments. Not only does it ease considerable stress, but it means they can look to do things to help their business that would be otherwise impossible; including hiring new consultants and taking on new clients. Other benefits can include:

Flexibility

With a line of credit model, such as Waddle’s it is there for you when you need it, allowing you to access funds only when you have to.

Protects relationships

Relationships with clients can be delicate. Having access to funds from invoices upfront can avoid confrontations in the event of a late payment. Also, a confidential facility means that the clients won’t even be aware of the facility.

Smooths uneven cash flow

Often the dates of client and candidate payments don’t match up meaning the money isn't always there at the time you need it. With funds from invoices up-front, this is no longer a concern.

Less risk than traditional funding

The money being borrowed is already owed to the agency, so there is less risk on behalf of both the lender and the borrower. In addition, there are no further assets used as security, just the invoices themselves.

What about permanent recruitment?

Whilst invoice finance is seen as a perfect fit for temporary recruitment, businesses specialising in permanent contracts have sometimes been neglected by debtor finance companies.

Why is this?

With temp work, the invoices are seen by a lender as less risky. The contractor has worked their hours, the timesheet signed, and the wages paid by the recruiter who has then issued invoices to the client. That’s a safe invoice! There can be no arguments about paying it.

With permanent, things aren’t quite so simple. A recruiter will be paid for placing the candidate at some point around the time they start work. However, there is a chance it might not work out; the worker could decide it’s not for them and not show up one day, or they could fail their probationary period. In these situations, a rebate may apply where the recruiter must return some of the funds. Therefore, that makes the invoices a riskier asset for use as security.

Whilst the temp business needs a cash flow solution to survive - they are in a constant state of having to pay their contractors whilst waiting for payment themselves - permanent recruiters aren’t quite in the same boat. They do however have businesses to run and require cash flow for all the reasons it’s needed by other businesses; for growth, hiring, paying overheads.

Things are changing. Invoice finance is now readily available for permanent as well as temp recruitment, driven by competition in the lending market.

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