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Nine questions to ask before choosing contractor finance

Contracting is in full bloom and growing rapidly beside the UK’s economic resurgence. To keep up, many recruitment agencies are taking advantage of the contractor finance available to them.

The UK Recruitment industry is continuing to grow. It saw a total revenue of £32.2 billion in 2017. 87.6% of that was achieved through temping and contracting – that’s a huge £28.2 billion.

By placing contractors your agency is going to be more financially stable, more profitable and more marketable.

Below are nine questions to answer before making a decision.


How much does contractor finance cost?

With so many variables it can be difficult to attribute an exact figure to a provider’s contractor finance. However, the usual costs incurred include:

  • Set-up fee
    Most invoice factoring providers charge an up-front fee just to get your new facility active. This fee will vary and can be quite substantial, so it is vital you find out what it is and whether it’s necessary.
  • Service fee
    Paid either monthly or annually, the service fee is normally calculated as a percentage of your agreed annual turnover. So a turnover of £700,000 with a service fee of 1%, would incur a £7,000 cost. You will get a better rate if you agree to a higher turnover, but be careful as this may increase the minimum service fee you have to pay.Also, take into account the way turnover is calculated.  Factoring companies will include VAT surplus to your turnover figure – so a contract requiring £100,000 worth of finance would be subject to service fees on £120,000 which includes the VAT (20%).
  • Auditing fees
    It is fairly common practice for lenders to carry out an audit every 3-6 months with some including an additional charge.


How long is the contract term?

There will be a minimum contract period, usually 1 or 2 years, and an extended notice period. Once you have signed the contract it’s difficult to terminate and there can be large penalties for premature leaving.


Will I be credit checked?

Yes. You’ll be required to present a financial case before proceeding with your application for finance.

This will normally include a detailed business plan, background information for the credit check and details of recruitment experience.


Will I be required to provide personal guarantees?

They will ask to be provided with a personal guarantee.


Can I switch the facility on immediately?

It varies with each lender but in most cases your business case will be forwarded to the underwriting team and processed within 1-4 weeks.


How does bad debt affect me?

If you’ve got a certain amount of debt that becomes old, this will normally be withheld from your facility, potentially causing cash flow problems and allowing less money than predicted to enter your account.

Also, as your turnover level is still the same, your service charges will not change meaning you end up paying for a slice of your facility you cannot use.


What is concentration and how does it affect me?

Concentration refers to how much of your total debt can be attributed to a particular client. This is a common problem especially during the infancy of a business as they will rely on repeat work. Lenders see reliance on less clients as high risk and withhold finance accordingly.


What happens if I want to leave my contractor finance provider?

Two things are likely to happen if you want to leave your agreement.  Firstly, as mentioned above, there will more than likely be a considerable cost for doing this if you’re still within your contract period.  This may be based on the debt you currently have or based on the total available to you.  The second, perhaps more problematic issue, is that many companies will stop paying your profit during the termination period.  As the average termination fee is around three months, you could be without any contract income for that period.

Obviously this can cause issues as you’ll still have bills to pay etc. meaning three months suddenly becomes a very long time indeed.


Who ensures the candidate is paid and the client is billed?

Are you getting a product that simply provides the finance? If you are, you’ll be responsible for time sheets  invoicing etc. Either you have to do this yourself, which is time consuming and onerous, on a weekly basis and will also involve the purchase of additional third party products or you will need to pay for an additional service often called ‘Pay and Bill’ – meaning a third party will invoice clients, collect time sheets and pay your contractors on your behalf.


This article was originally published on June 18, 2014 and updated Mar 12, 2018

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