How much is invoice factoring costing your recruitment agency?
Recruiters are born entrepreneurs that pride themselves on their ability to scope the best deals and negotiate the best terms. So why do so many agencies tolerate poor deals on invoice factoring to run their contractors?
It seems so contrary to everything a recruiter prides themselves on, that owners are ignoring the most effective way to grow their agency. On the surface, most invoice factoring providers offer a great service for a great fee. However, if you do some more research, you’ll find an abundance of clauses, terms and conditions and extra costs you’ll be expected to pay.
Here is some useful advice that will help you work out if you’re using the wrong invoice factoring provider.
If it costs you to set up an invoice factoring facility, it’s too expensive!
Traditional financiers will often focus on their headline service fee that, while appearing cheaper than most, fails to consider the several unavoidable costs of invoice finance.
Many invoice factoring providers have extra fees and hidden charges – sometimes as many as 21! So, whilst they may initially seem like a cheap, viable option, it’s worth digging a little deeper. Some of the extra fees you’ll be expected to pay include:
- Setup costs
- Not only will it take up to 6 weeks to get a facility in place but, depending on the size of your business, you’ll be charged anywhere from £500 up into the thousands.
- Service charge
- A service charge is usually calculated using a sliding scale, which is anchored to how much business you’re bringing in. The more business you’re pushing through, the lower the service charge. Whilst this might not be too expensive for established agencies, it can drain start ups and young recruitment businesses. And, either way, it’s an unnecessary spend.
- Most financiers will determine a rolling monthly fee based on the projected turnover from invoices you put forward in your business plan.
- Minimum thresholds
- You are legally committed to push a minimum amount of business through most financiers, which means that agencies will often pay for a facility they’re not using.
- This can be anywhere between £3 – 15,000 and means that in certain sectors like oil, whereby demand can drastically fluctuate, agencies can be penalised.
Every day you wait on late invoices, your agency loses money
Invoice factoring providers loan money against your invoices and then collect on the money owed. By advancing a conditional amount upfront, they will then release the total invoice value once your client pays them.
The amount they advance is conditional and will usually sit between 60-90% of your invoice value, which can seriously restrict your cash flow.
In short, working capital affects everything. Separating your agency from such a significant amount of cash flow limits how much you can recycle into growing your contract book, paying your overheads and securing a profit.
See how cash flow affects your growth and how to advance 100% of your invoices weekly with Sonovate.
Financiers profit from your late invoices
In addition to your service fee, setup costs and minimum charges, a lot of invoice factoring financiers will also charge interest on the amount they advance to you whilst they collect the payment from your clients.
This means that plenty of financiers are actually making money from your late invoices.
It’s another sum of money taken from your profit, which means you have less money to grow your business effectively.
The real value sits in outsourcing your back office
Processing your contractors doesn’t grow your profits… placing them does.
Which is why the more time and staff you dedicate to placing contractors the faster your agency will grow. It’s fairly straightforward.
How much is also lost in office space and wages that could be better spent on outsourcing your back-office and the headache that goes with it?
How much did your invoice factoring provider cost your agency last year… four, five, ten deals? Now is the time to sit down, do the maths and calculate the reality of how much you are spending to use your current invoice factoring provider.
Really, you should only be expected to pay one fee – and there should be no hidden fees, extra charges or financial penalties. Invoice factoring should be designed to help your business grow, not hold it back.
This article was originally published on March 2, 2017 and updated Mar 29, 2018