Four Reasons Recruitment Agencies Should Question the Banks
When an agency goes in search of finance to grow or start their contractor book, they tend to wander down the only path familiar to them, towards the high street bank.
Agencies can wave goodbye to any flexibility with their finance, control over their debtor book, and expect to be locked into that decision for at least the next year, likely two.
So why use them if they are so limited?
Banks are easy to find, long-standing, and people are generally unaware of the alternatives out there. Which is why we are lifting the lid on how banks are not the best avenue for finance.
They insist on an all-turnover agreement
To avoid what banks perceive as “high-risk” they force complete control over the financing of an agency. By agreeing to what is called an all-turnover agreement the entire contract book of an agency, and sometimes their perm clients too, are financed through the bank.
Why this is so bad?
Agencies lose the flexibility to choose which clients are then funded through the bank and those that are not. Some clients may object to dealing with a financier in addition to your agency.
An agency is sacrificing control over its entire debtor book, which may sometimes include forcing its perm offering into being funded by the banks.
Banks also lump clients together so that one client’s poor repayments will affect the amount an agency can advance to their other clients. The difficulty of using a bank is that you can’t choose to remove the bad apple from spoiling the bunch by self-funding them.
They have lengthy contractual tie-ins
Most banks take a long time to make decisions and when they do, they want those contracts to be lasting in blood. There is rarely ease of entry into the market with a bank, and the contract will almost certainly be between 12 and 24 months.
If it was time-consuming and difficult to secure a contract in the first place, it’s going to be equally difficult in trying to leave it. Any decision to use a bank should be made with the knowledge that they are pretty much set in stone.
Debentures on your business
A debenture is a legal agreement that acts as security against a debt and is common practice in business. It simply means in the unlikely event that a business goes bankrupt or vanishes, there’s a safeguard in place for the financier – the bank in this case – to have first access to any remaining assets.
From day one banks require a debenture to be in place on your business, whereas more realistic financiers realise it’s only a necessity once your business develops and may only require one when you start running multiple contractors through a client.
It’s the same agreement as a debenture but instead of being held against your business it’s levelled against you personally.
Why is this a problem?
Recruitment agencies usually have little assets in comparison to the large amounts of money that are circulating through them. Banks, which are massively risk averse institutions, like to level security against both the business and the people personally behind it to safeguard their lending.
Personal guarantees are only a problem if you owe money and your business folds. However, it will mean the personal risk involved is increased as you are tied into the success of your company, with your house, car, or any other assets acting as potential collateral.