When we talk about the cash gap in contract recruitment, we’re referring to the shortfall between paying contractors on a fixed regular basis and being paid at an undetermined later date by clients.
Your agency has overheads and salaries to consider, so the delay between paying contractors and being paid by clients puts a complete stranglehold on its financial security.
Business is better when it’s predictable, which is why agency needs cash flow that’s not dependent on to whether a client pays on time.
The scale to which agencies are held to ransom by late invoices is highlighted by the fact that so many remain unsettled outside of the agreed payment terms.
Amicus Commercial Finance recently found that:
- 61% of SME invoices go unpaid in the agreed payment period
- 16% remain unpaid after 90 days
- 7% are left unsettled after six months
If you have intentions to grow or experience a slowdown in business, the financial support will come from your own pocket while your profit sits tied up in unpaid invoices.
“ACF found almost 30% of SMEs experience sustained stress and worry over their cash flow, with 10% fearing insolvency.”
It’s a frustrating reality that businesses will delay paying invoices to bolster their own working capital, and that recruitment agencies have very little at their disposal to affect this.
Pressuring a client over late payments can risk future business with them and, although a good relationship with your client can encourage timely payment terms, it’s not a sustainable model for growth.
It’s why if agencies want to run contractors, they’ll need to secure finance to bridge the cash gap.
It’s the lifeblood of any business, which is why ill-fitting finance can cause a serious clot in your operations that may send your agency six feet under.
After their first year of trading, Sonovate found the average recruitment agency placing contractors to have £50,000 in arrears from unpaid client invoices.
Your cash flow might be manageable, but if you can’t predict your payments with complete certainty, you can’t safeguard your agency from a rainy day.
An old solution
Traditional invoice finance for recruitment
Originally the only finance available to agencies was offered by the banks, making it the unavoidable way of funding contractors.
Invoice discounting and factoring services provided by the banks served their purpose for the last 30 years or so, but the finance was restrictive and limited in its nature. It catered to several industries, withheld large sums from invoices before they themselves were paid by clients, and ultimately didn’t meet the needs of the agencies.
It’s the financial headroom and predictability that comes from receiving the full payment of invoices that allows agencies to roadmap and scale. You can’t efficiently do either of these if you’re waiting months to receive the full payment from your invoices.
It’s the difference between a conditional drawbridge that’s lowered once you meet the criteria and a bridge that’s always there to provide the secure financial footing for you to access your working capital.