For the past few decades, factoring and invoice discounting agreements have allowed recruitment agencies to finance their contract business by allowing them to access funds tied up in invoices.
This relationship between finance providers has worked well with recruitment agencies needing the funds, and banks being more than happy to give it to them. However, the recruitment industry is ever evolving, so are invoice discounting or factoring still the best source of finance for recruiters today?
First, a little background about factoring and discounting.
Invoice discounting essentially allows a business to borrow against unpaid invoices, thus freeing up cash flow etc. With this form of finance, the recruitment agency would be responsible for all aspects of credit control and timesheets administration so would need a process for collecting payment etc.
Similar to invoice discounting, invoice factoring allows a company to release a certain percentage of total invoice value. The main difference between invoice discounting is that with invoice factoring, credit control will be taken care of by the finance provider. The finance providers details will also appear in any contracts sent to clients.
The main headaches of invoice discounting & factoring for recruiters:
Not industry specific
Invoice discounting and factoring are not designed solely for the recruitment industry, many other industries factor or discount invoices to improve their cash flow. This could mean working with a finance provider who does not understand the complex world of recruitment. More importantly, they are not typically flexible enough to adapt to any challenges.
Only provide finance
As well as money, each contractor or temp will require some sort of administration. From raising contracts through to approving timesheets and, most importantly, collecting payments, somebody will need to take responsibility. Your finance provider is just that, a provider of finance.
Putting in place the processes to deal with this can add further costs to the process and squeeze the margins you have worked hard to put in place. Furthermore, you will be responsible for all legislation and compliance such as AWR in the UK.
All or nothing
Most invoice discounting and factoring agreements will require a business to finance all invoices via the facility. There is often no flexibility on this, regardless of whether the agency needs to finance the invoice or not.
A concentration limit is one of the most common ways a finance agreement can restrict recruitment businesses. In essence, a concentration limit is designed to minimise the impact of bad debt by not allowing businesses to have all of their invoices with one client. What this means in practice is that recruiters working with well-known clients requiring a large number of staff will be stopped from placing further contractors once the concentration level has been reached.
Concentration is a percentage of total funding limit which can be attributed to one client i.e. you have a funding limit of 300,000 and have 120,000 outstanding with one client. If your concentration limit were 40%, then you would be unable to trade further with that client meaning unhappy clients or renegotiation of terms.
See how Sonovate compares to traditional invoice financing.
This article was originally published on Jul 23, 2013 and updated May 6, 2019