Cash flow is one of the most important factors in maintaining a stable and successful business, particularly during periods of economic uncertainty. Client payments may slow down, while suppliers and overheads still need to be paid on time.
While overdrafts and loans are possible funding options, invoice finance can often be a more flexible and effective way of supporting cash flow, particularly as agency turnover fluctuates throughout the year.
Below are some of the key reasons why recruitment agencies should consider invoice finance as a way to improve business cash flow.
Using the Bank’s Money Instead of the Company’s
Any recruitment agency funding contractor placements using its own cash reserves should seriously consider using invoice finance instead. This allows the agency to use the bank’s funding rather than tying up its own working capital.
An invoice finance facility, which lends against the debtor book, can often provide access to funding at a lower cost than a loan or overdraft. It also offers additional protection because the funding is typically based on the client’s credit rating rather than the agency’s own financial position.
Credit Protection Is Often Included
If an agency uses its own funds to pay contract workers instead of using invoice finance, there is a risk that those funds may not be recovered if the client becomes insolvent or refuses to pay.
While agencies can arrange separate credit insurance policies, many invoice finance providers include some level of credit protection, such as Bad Debt Protection, within their fees.
This can provide additional peace of mind and help reduce financial risk.
Funding Is Based on the Clients and the Size of the Debtor Book
Funding within an invoice finance arrangement is usually based on a prepayment percentage of the overall debtor book, typically between 80% and 90%.
For example, if the debtor book is worth £100,000, the invoice finance provider may make up to £90,000 available for borrowing. It is then up to the agency to decide how much of those funds it wishes to draw down.
Importantly, as the debtor book grows, the available funding can also increase, provided the debt is not growing due to overdue payments. This means the funding facility can scale alongside the growth of the agency.
Provides 90–120 Days of Credit Support
One of the biggest challenges with invoice payment terms is that clients do not always pay on time. Even short delays of a few days can place unnecessary strain on cash flow.
In some cases, clients may insist on payment terms of 45, 60, or even 90 days. This can create significant pressure, as agencies may need to fund several months of contractor payments before receiving payment for the first invoice.
Invoice finance facilities are typically designed to provide funding support for between 90 and 120 days. This helps alleviate cash flow pressure and allows agencies to work confidently with clients who have longer payment terms or slower payment processes.
Less Restrictive Than an Overdraft or Loan
When an agency applies for a loan or overdraft, it must usually specify the amount required, with approval based on the financial history of the business and/or its directors.
If additional funding is needed later, the process can involve further scrutiny, additional security requirements, and lengthy approval times.
Invoice finance facilities work differently. Funding is generally based on the creditworthiness of the agency’s clients and the size of the debtor book rather than the agency’s own balance sheet.
This means that as turnover and invoicing increase, available funding can grow alongside the business’s growth. In addition, the finance facility is linked to the client’s credit rating rather than the personal credit profile of the directors.
MAYACHI has many years of experience helping recruitment agencies arrange invoice finance facilities tailored to their individual needs. Through strong relationships with a wide range of invoice finance providers, MAYACHI can assist with introductions and support agencies in setting up a facility that works effectively for their business.