Invoice finance is a staple of the recruitment industry and is widely used by agencies making contract and/or temporary placements. These types of placements require access to funds to pay candidates before the client settles the invoice.
However, recruitment directors often ask MAYACHI whether they should consider using invoice finance to fund permanent placement invoices as a way to support cash flow. In almost all cases, the answer is no.
Using invoice finance for permanent placements is typically one of the most expensive funding options available to recruitment companies due to the way fees are structured, usually as a percentage of the invoice value. Additionally, finance providers will often only advance 60–75% of the invoice value upfront. This is significantly lower than contractor invoice finance facilities, which can offer prepayments of up to 95%.
When evaluating the cost of permanent invoice finance, it’s important to do the following calculation:
- Calculate the average monthly value of permanent invoices (including VAT)
- Multiply this figure by 12 to get the annual invoice total.
- Multiply the annual total by the fee rate charged by the finance provider.
- Determine the prepayment amount the agency would receive for one month’s invoicing.
- Divide the annual fee by the monthly prepayment amount, then multiply by 100.
- This gives you the effective annual interest rate you’re paying to borrow the prepayment.
Example:
- ABC Agency Ltd raises £20,000 + VAT in permanent invoices each month.
- They’ve been offered a facility at 5% of the invoice value, with a 70% prepayment.
- Based on this, ABC Agency would receive a £16,800 prepayment but pay £14,400 annually in fees.
- The effective interest rate? A staggering 85.71%!
There are many more cost-effective ways to secure funding for your agency, without resorting to expensive permanent placement financing. Before looking externally, agencies should also assess their internal processes to understand why cash flow pressures exist. Often, the issue lies not in client payment delays but in inefficient credit control or billing practices.
MAYACHI has many years of experience helping recruitment agencies with their funding needs. This includes arranging short-term loans, structuring invoice finance solutions, and improving internal cash flow management. MAYACHI offers practical, hands-on support to help agencies move from a cash flow crisis into a more stable and positive financial position.
