Despite most people disliking their banks and saying worse about bankers, more people are likely to get divorced, some twice, than change invoice factoring providers.
Recruitment is a hyper-competitive market where agencies need to consider every possible edge to stay ahead. Invoice factoring is possibly the biggest, and yet least understood, growth hack for agencies placing contractors.
What does bad invoice factoring look like?
The wrong finance can seriously hamper agencies from scaling. We’re talking six-figure sums being skimmed off profit margins, and hours tied up in admin that could be better spent selling.
We’ve all heard that turnover is vanity, profit is sanity, and cash flow is the gritty reality that drives a recruitment agency – but here’s why it’s so critical to agencies placing contractors.
Agencies need to bridge the financial gap between paying contractors regularly and receiving payment from clients at a later date. A gap that sits on average at around 56 days… sometimes longer.
Invoice factoring providers have traditionally advanced a conditional amount from client invoices. This will typically be anywhere from 70-90% of the invoice. And it means agencies have to wait until their client pay their provider to receive their outstanding profit from invoices.
Now consider if you have five, fifteen, or even fifty contractors, and that up to thirty percent of your cash flow is tied up in when your client pays… it’s not conducive to growth.
With traditional financiers demanding lengthy contractual tie-ins and heavy exit fees, you really can’t afford to make a decision without knowing the financial reality!
If you’re advanced between seventy to ninety percent of an invoice and left waiting on a paid-when-paid dynamic for the full amount, then your cash flow is vulnerable and so is your agency’s growth.
Remember that the additional thirty percent is the working capital that other agencies are using to pay their overheads and scale.
They won’t let you choose your friends
Agencies are often tied to concentration restrictions which limit the amount of business you can have with any-one-client. Too many contractors with a single client and your funding will be restricted as it can be seen by traditional financiers as a risk.
Why would you settle for a conditional relationship?
You see too much of them
You might want to choose which clients you use invoice factoring for, but plenty of providers will force your entire book onto their funding.
Maybe you have clients that might not want their contractors to know they’re using a factoring provider, or maybe you want the flexibility of knowing you can self-fund.
They charge more a wide range of additional fees
There are a host of additional fees that can be included with traditional financiers and are often swept under the carpet.
- Setup costs
- Re-factoring costs
- Interest on late payments
- Credit checking costs
- Auditing fees
- Renewal charges
- Exit charges
These are just some of the hidden costs of invoice factoring – see a complete breakdown of what invoice factoring really costs in 2019.
With long contractual tie-ins, protracted notice periods and weighty exit fees, traditional financiers can really dig their claws into an agency.
The churn rate is so high among them that they rely on charging agencies for entry, use, and exit, in an attempt to hit them at every gate.
Ask yourself why they would need to lock your agency into a lengthy contract if they’re providing the best advantage to recruitment agencies?
So, what’s the solution?
If you want to unlock your growth and maximise your agency’s profit, it’s simple… you need to place more contractors. To do this you’re going to need an invoice factoring provider that can both ensure constant cash flow and remove the time consumption of processing five, fifteen, or even fifty contractors.
Turnover might look nice but it won’t keep your agency afloat if cash flow starts drying up. Resting your agency’s security on a lending solution that provides a conditional amount of cash flow, or a limited amount of back-office support, will hamstring your agency’s growth.
We provide recruitment businesses with invoice, finance and support for just one fee. And we pay 100% of your profit every week, straight into your account.
See how our invoice factoring solution works.
This article was originally published on Feb 14, 2017 and updated Jul 12, 2019