Produced by Total Back Office Solutions Ltd
When it comes to recruitment for contractors, many recruitment agencies have to rely on some kind of invoice finance to smooth out the kinks in their day-to-day cash flow. Discrepancies between needing to pay a candidate and receiving payment from a client can easily cause a lot of temporary shortfalls. However, for something so crucial to the operating success of many agencies, recruitment invoice finance can be a tough nut to crack.
Here’s Total Back Office Solutions’ take on the 10 most important considerations when it comes to setting up invoice finance:-
1. Which type of invoice finance is best for you? You’ll need to consider exactly why your agency needs the financing as this will determine what kinds of funding you’ll be offered by the lender.
a. Invoice discounting leaves it to you to notify clients of invoice totals, and chase payments, along with reconciling.
b. Invoice factoring on the other hand involves the factoring company taking a more hands-on approach; you simply notify them of all invoices and your clients pay directly into their bank account, and they handle the chasing of payments.
2. Solid financial forecasting is vital. If you don’t have representative, practical projections, the calculation of your charges and minimums will be inaccurate and you could end up paying higher fees for invoicing scope which is beyond what you need.
3. When your invoice finance is initially calculated, you will often be quoted an annual minimum fee for the service. This is another thing which relies on your projections, and you must make sure they are accurate, as if you don’t meet your projections you could end up paying a higher fee.
4. A completely accurate and up-to-date database of all current and nascent clients is vital, as the core of invoice funding focused around your clients ability to pay. Credit checks are an important form of risk assessment for the lender, and their outcomes can influence charges.
5. Having a poor personal credit rating could damage your chances of successfully setting up invoice funding, as invoice finance companies will often credit check company directors as well as clients. They might also request a list of personal assets and liabilities from the directors.
6. Credit insurance and bad debt insurance are customarily offered by invoice finance companies. They provide a financial safety net, but also increase fees and charges, so consider your company’s situation prior to agreeing to them.
7. Make sure the cost of the prepayment amount leaves you with your margins intact. Most invoice finance companies will lend a percentage (usually 75%-90%) of the value of your invoice to your client, to cover the amount being paid to the contractor. In the case of any shortfall, you will have to absorb that with your cash flow. For example, if the invoice was for £1000 and you were provided with 75% funding, and the contractor’s fee was £900, you would be required to make up the £150 shortfall.
8. Make sure you know the detail of the contract you’re signing up for. The majority of invoice finance agreements have a fixed term which can often range from 30 days to 24 months (though 12 months is the standard). There can be long obligatory notice periods and high exit fees if you want to cut the contract short.
9. When reviewing the contract, as well as term length, keep an eye out for any invisible charges which aren’t included in initial quotations. If you’re unsure, some things to ask about include set-up fees, bank/transfer charges, annual renewal costs, and software/audit fees.
10. Large amounts of paperwork will be required when signing the facility documents. The majority of invoice finance agreements include personal guarantees from directors, so it is recommended that you seek professional advice prior to signing.
A lot of this can be such a potential headache for a recruitment agency which just wants to focus on the bottom line. At Total Back Office Solutions Ltd (@tbos_ltd on Twitter), we’ve used our decades of accumulated knowledge to create solutions designed specifically for the recruitment industry. We can offer help and advice to any agency on new or existing funding arrangements. Visit www.TBOS.com for more information or to contact us. We also have a subsidiary company, designed specifically for short term funding agreements. Fund My Contractor provides short term, no contract funding to recruitment agencies that don’t need a full invoice finance arrangement. Use the handy profit calculator at www.FundMyContractor.co.uk to see how Fund My Contractor could be of use to you.
