For many years now, recruitment agencies have been able to finance their contract business by utilising both Invoice Factoring and Invoice Discounting. These finance methods unlock cash tied up in unpaid invoices, meaning there is no waiting around or chasing up late customer payments.
This connection between finance suppliers has functioned admirably with recruitment agencies requiring the assets, and lenders being glad to give it to them.
However, the recruitment business is always changing and constantly evolving, so are invoice finance products for recruitment such as invoice factoring or discounting still the best wellspring of money for them today?
Background information on both factoring and discounting:
Invoice discounting basically permits a business to acquire against unpaid invoices, accordingly, opening up income and so on. With this form of finance, the recruitment agency would be responsible for all parts of credit control and timesheets organisation so would require an interaction for gathering payment and so on.
With Invoice Factoring, the factoring company will purchase your unpaid invoices from you and take control of the collection process. You will not need to chase up clients and customers for payments any longer if you utilise this method.
You will receive payment for a percentage of the total outstanding invoice amount upfront. After the full amount has been collected by the factor, they will advance you the difference, minus an agreed fee for their services. The key point to take away here is that your customers will deal with the factoring company when making payment, not you.
Recruitment Factoring is normally best suited to businesses that have had outstanding accounts receivable between 60-90 days or longer. It is also highly useful for business ventures that don’t want to be burdened with recover outstanding invoice payments themselves and would prefer others to deal with it for them.
Issues with factoring and discounting for recruiters
We will now walk you through some of the issues that come attached to obtaining finance by the use of factoring and discounting for recruitment agencies, which could potentially put recruiters off the idea of using them.
Not industry specific
Invoice discounting and factoring were never designed only with the recruitment industry in mind. Lots of other industries factor or discount invoices to improve solve their cash flow problems. This could lead you to working alongside a finance provider who does not understand the complexities surrounding recruitment. Also, they are not typically flexible enough to adapt to any challenges.
Only provide finance
On top of cash, every contractor or temp will require a type of organisation. From raising agreements through to supporting timesheets and gathering payments, someone should assume liability. Your money supplier is only that, a supplier of money.
Setting up the cycles to manage this can add further expenses for the interaction and crush the edges you have endeavoured to set up. Moreover, you will be liable for all legalisation and compliance like AWR in the UK.
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All or nothing
Almost all invoice discounting and factoring agreements will require a business to finance all invoices via the facility. This will not usually come with any flexibility, regardless of whether the agency needs to finance the invoice or not.
Concentration limitations
A concentration limit is perhaps the most well-known way a money understanding can confine recruitment businesses. Basically, a concentration limit is intended to limit the effect of bad debt by not permitting organisations to have each of their invoices with one customer. What this implies is that recruiters working with notable customers requiring an enormous number of staff will be halted from setting further workers for hire once the focus level has been reached.
Concentration is a level of total funding limit which can be credited to one client. For example, you have a financing breaking point of 300,000 and have 120,000 extraordinary with one customer. Assuming your fixation limit were 40%, you would not be able to exchange further with that customer meaning despondent customers or renegotiation of terms.
Read more: Compare recruitment factoring
Do you require more information?
Still need questions answering, if you think your business will benefit from invoice factoring just send us an email and ask whatever you like. A member of our expert team will be more than happy to offer you a helping hand.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.