The recruitment industry is one where cash flow issues can create significant challenges that threaten the very survival of some agencies. Most recruitment agencies have a diverse range of clients, varying in size, industry and business type. Many of these companies will only engage in recruitment sporadically, which means they cannot be relied on for a steady stream of income. This can make it difficult to plan.
A 75% rise in the UK employment rate in the first three months of 2017 has renewed optimism and opened up opportunities for recruitment firms as well as benefiting the wider economy. This is the highest employment rate since 1971, according to the Office for National Statistics (ONS), with technology and service industries forging ahead in job creation.
The outlook is rosy for the recruitment industry, and separate research was undertaken by the Recruitment and Employment Confederation (REC) echoes this, with 9,565 recruitment agencies reporting an annual turnover of more than £250,000. In spite of these positive findings, the statistics fail to add up as many recruitment firms find themselves in precarious circumstances.
Keeping cash flowing through the business is a major concern. Although recruitment agencies receive substantial fees for placing a candidate successfully, many clients recruit sporadically and fail to provide a steady and reliable stream of income. Another key issue is that invoices are issued to clients once candidates are placed successfully. This long payment cycle can result in a 30-, 60- or 90-day wait for payment. Clients who fail to pay on time or at all can quickly undermine a profitable business, limiting the availability of capital to meet payment deadlines for temp and perm placements, and other operating expenses as well as restricting the ability of the recruiter to grow the business and take it to the next level.
There can also be cash flow problems created by the nature of the work. Agencies that hire temporary staff members and contractors will need to pay these workers, along with their usual operational expenses. However, the end customer may not pay the recruiter for 30, 60 or even 90 days, which creates an unavoidable cash-flow shortfall for agencies of every size.
Many firms naturally gravitate towards the banks for finance as they already have an account with them. Recruiters turn to short-term business loans, overdrafts and credit cards to plug the cash flow hole, particularly during the early years of the business. However, loans and credit cards carry risks of failing to meet monthly repayments or defaulting on the loan, which can incur high charges and result in the business being damaged by a poor credit rating.
In contrast, invoice finance (factoring and invoice discounting) is fast and flexible, raising finance against unpaid client invoices that can be used to pay the wage bill on time. A factor or factoring company can advance funds tied up in an unpaid client invoice within 24 hours of it being issued, unlocking funds early and effectively transferring the payment delay on to the provider. Let’s look at how recruitment finance works.
How it Works
Recruitment agency factoring is more suited to smaller firms that have lower invoice values and limited access to bank funding. It can fill the cash flow hole by advancing up to 95% of the value of the outstanding invoice once it has been issued to the client. Once the candidate is successfully placed and the invoice is issued to the client, the factor provides the balance of the invoice, minus fees.
As part of the factoring agreement, the factor or factoring company manages credit control and payroll administration (processing timesheet information) on behalf of the business. In this way, freeing up resources in small recruitment firms. As a result, clients are aware that a factoring facility is in place.
Recruitment invoice discounting targeted at larger, established recruitment agencies that have their robust finance procedures in place as credit control and the collections process remain in-house. Therefore, clients remain unaware of the provider’s involvement. Both factoring and invoice discounting can give recruitment agencies the quick cash flow fix they need to pay temp and perm placements as well as cover other operating expenses without having to wait for clients to pay.
How can Recruitment Finance help?
Factoring and invoice discounting for recruitment and staffing agencies is a way of bridging this cash-flow gap. Rather than waiting for a client to pay for the recruitment services they have received, a third party finance provider (known as an invoice factor) will pay up to 95 percent of the invoice within 24 hours of it being issued.
This means the recruitment agency will receive an immediate influx of cash, allowing it to pay the temporary worker and cover other operating expenses, without having to wait for the invoice to be paid.
If you would like to remove the funding and administration burdens from your recruitment business, please call 08000 24 24 51 or email firstname.lastname@example.org for free and confidential advice from one of our professional advisers.