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Nine questions to ask before financing contractors

Contracting is in full bloom and growing rapidly beside the UK’s economic growth. To scale up, many recruitment agencies are taking advantage of the invoice finance options available to fund contractors.

The REC’s annual Recruitment Industry Trends report found that the UK recruitment industry grew by 11% to £35.7 billion in 2017/18, and is projected to grow a further 4% in 2019, and 5% more in 2019/20. The report also reported that:

  • 64% of temporary assignments were for 12+ weeks, compared to 61% in 2016/17, and 20% were for 6+ months.
  • The average value of permanent placements was up by 6.4% since 2016/§7, at £4,238.

Placing contractors increases your business financial performance and valuation. To help you find the right provider for your business, we’ve shared nine questions you should consider before making a decision.

How much does finance to fund contractors cost?

With so many variables, it can be difficult to attribute an exact figure to a provider’s invoice finance, however, the usual costs incurred include:

  • Set-up fee
    Most invoice factoring providers charge an up-front fee to get your new facility active. This fee will vary and can be quite substantial, so it’s vital you find out what it is and whether it’s necessary.
  • Service fee
    Paid either monthly or annually, the service fee is normally calculated as a percentage of your agreed annual turnover. So, a turnover of £700,000 with a service fee of 1% would incur a £7,000 cost. You will get a better rate if you agree to a higher turnover but be careful, as this may increase the minimum service fee you have to pay. You also need to take into account the way turnover is calculated. Factoring companies will include VAT surplus to your turnover figure, so a contract requiring £100,000 worth of finance would be subject to service fees on £120,000, which includes the VAT (20%).
  • Auditing fees
    It is fairly common practice for lenders to carry out an audit every 3-6 months, with some including an additional charge. 

How much cash can I release from my invoices?

The amount of cash you can release from your invoices varies from provider to provider. The amount is affected by a number of variables, e.g. fees required.

To help you see how the amount of cash you can release could be affected, we’ve compared Sonovate’s offering to that of a traditional financier:

 

Sonovate Financier
Charge 600 600
Pay 500 500
Contract length 3 months
(12 weeks)
3 months
(12 weeks)
Total contractor pay (£) 30,000 30,000
Total GM (£) 6,000 6,000
Weekly invoice (£) 3,000 3,000
Weekly pay (£) 2,500 2,500
Fee 3% 3%
Invoice profit released 97% 77%
Weekly GM paid to agency (£) 410 0
GM paid (£) when invoice is paid (30+ days later) N/A (already paid) 410

 

How much cash could you release into your business?

Who ensures the candidate is paid and the client is billed?

Are you getting a product that simply provides the finance? If you are, you’ll be responsible for timesheets, invoicing, etc. Either you have to do this yourself on a weekly basis, which is time consuming and onerous, and will also involve the purchase of additional third party products. 

How long is the contract term, and when can I start using the facility?

There will be a minimum contract period, usually 1 or 2 years, and an extended notice period. If you want to terminate your contract early, you might face significant penalties.

When it comes to switching on the facility, it varies with each lender. In most cases, your business case will be forwarded to the underwriting team and processed within 1-4 weeks. 

What information will I need to share to complete a credit check?

With many finance providers requiring a credit check, it’s important to find out exactly what information they will need to see.

The standard procedure is to present a financial case before completing your application. This will normally include a detailed business plan, background information for the credit check and details of recruitment experience.

What’s a personal guarantee and what does it mean for both my business and myself?

A personal guarantee is a legal promise, made by an executive or partner in a business, to repay any credit issued to their organisation. When you provide a personal guarantee, you’re held personally responsible for repaying a debt if your business is unable to.

When it comes to funding your contractors, most finance providers will ask for a personal guarantee.

How does bad debt affect me?

If you’ve got a certain amount of debt that becomes old, this will normally be withheld from your facility, potentially causing cash flow problems and allowing less money than predicted to enter your account.

Also, as your turnover level is still the same, your service charges will not change, meaning you end up paying for a slice of your facility you cannot use.

What is concentration and how does it affect me?

Concentration refers to how much of your total debt can be attributed to a particular client. This is a common problem, especially during the infancy of a business, as they will rely on repeat work. Lenders see reliance on less clients as high risk and withhold finance accordingly.

What happens if I want to leave my provider?

Two things are likely to happen if you want to leave your agreement. 

Firstly, as mentioned above, there will more than likely be a considerable cost for doing this if you’re still within your contract period. This may be based on the debt you currently have or based on the total available to you. 

The second, perhaps more problematic issue, is that many companies will stop paying your profit during the termination period. As the average termination fee is around three months, you could be without any contract income for that period.

Obviously this can cause issues as you’ll still have bills to pay, etc. meaning three months suddenly becomes a very long time.

 

To help you find the right finance provider for your business. we’ve created an insightful comparison page that shares the difference between traditional finance providers and Sonovate.

This article was originally published on June 18, 2014 and updated Jul 16, 2019

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In this ebook

  • State of the contract market
  • Why enter the contract market?
  • Outsourcing to grow
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  • How to find the clients hiring contractors
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  • 5 Sectors primed for growth in 2019

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