Five things to know when choosing invoice finance for your recruitment agency
When choosing invoice finance for your recruitment business it pays to analyse the market and select the finance that’s right for you.
Invoice finance comes in many forms and is typically broken down into:
- Invoice factoring: where the agency sells their invoices to a third party at a discount. In addition to providing finance, the financier also performs credit control and collects payment on the agency’s behalf in a disclosed manner.
- Invoice discounting: purely money all other responsibility remains with the agency – (credit control, payroll, etc).
- Confidential invoice discounting (CID): invoice financing that is arranged confidentially, so end clients are unaware that the agency is being advanced capital against sales invoices before payment is received. ID and CID is typically available to agencies with turnovers in excess of £250k+. A third type of discounting – Disclosed Invoice Discounting is known as a halfway house between factoring and confidential invoice discounting and is for those companies whose balance sheets are not quite strong enough for CID.
- Confidential Factoring: an innovative, hybrid product and offers the best of both worlds – the credit control and the cash advance of a factoring facility, with the confidentiality of invoice discounting. Agency’s role is hidden as the financier and back office.
- Disclosed Factoring with Back Office: the agency factors invoices with financier in a disclosed way (i.e. the financier collects money on behalf of the agency in the financiers name.) The product is accompanied by back office functions to support, manage and administer the running of contractors. Back office functions vary between provider in terms of quality of tech product and service levels.
Here are five things to know when choosing invoice finance for your recruitment agency:
1. Invoice finance fees
Fees vary between financier. Large banks for e.g. (Lloyds, RBS, HSBC, Barclays) have setup fees, where other independent financiers don’t. Key fees to enquire about include:
- setup fee
- service fees
- insurance (if factoring)
- termination fees
- refactoring fees
- interest fees (also check how BOE base rate rises affect)
- fees associated with reviewing, renewing or increasing your funding
- administration fees
- account service fees
- legal documentation and process fees
2. Terms and Conditions
Larger recruitment businesses who have used or are using a form of invoice finance will be familiar with personal guarantees and lengthier setup processes, typically owing to the complexity of the facility.
If your business is choosing finance for the first time, here are some terms to familiarise yourself with:
- personal guarantee
- debenture (the name typically given to a security agreement that sets out the terms under which the borrower provides security to a lender.)
- contract length (ranges from no fixed term to fixed)
3. Invoice finance facility limits
Some financiers will apply limits to your funding to protect all parties interests. These include:
- concentration limits
- drawdown limits
- export debt
- facility size
- withholding profit
Again, it’s worthwhile going through each point listed with a prospective financier to see if they and apply and at what point they would ‘kick-in’. Providing access to your sales ledger will help you understand your position with regards to the above.
Process requirements vary from agency to agency. Agencies on invoice discounting will be in charge of their credit checking, payment and invoicing processes. However, other routes require the agency to develop a relationship with the financier.
All financiers will offer demonstrations of their product / service. Here are some questions to ask during this phase:
- How does the credit checking process work?
- Who issues contracts?
- Am I covered in the event of a bad debt?
- How is customer service structured? What are they responsible for?
5. Tech Platform
Depending on the size of your business and type of invoice finance needed, you will have differing tech requirements. An agency with an established back office team and processes may pursue invoice factoring or invoice discounting. Other agencies may want to bring the solution all under one provider – this is where disclosed factoring with back office financiers come into play.
Things to check if your financier is provides tech to support the process:
- Manual and online timesheets
- Credit checking
- Contracts (inbuilt, customised)
- API connectivity (accounts, CRM)
Note: not all conditions apply to all financiers.