There are two main ways of financing temporary and contractor placements for recruitment agencies: using a Pay-and-Bill provider or an Invoice Finance facility.
Each method has its pros and cons. Pay-and-Bill works best in the early stages of an agency’s journey into contract placements, or for low-level variable-hour temporary placements. Invoice Finance, on the other hand, tends to be a cheaper option once an agency begins generating larger turnover and profits.
Although the potential cost savings of moving to Invoice Finance can be significant, agencies need to have a number of processes in place before making the transition:
ROBUST BACK OFFICE
Pay-and-Bill facilities typically include administrative services such as timesheet processing, client invoicing, candidate payments, payroll, and credit control. Under an Invoice Finance arrangement, these services are not provided by the funder. They must instead be handled internally by your back-office team or outsourced to a specialist provider.
It’s important to ensure your team has relevant experience to manage these processes effectively, as poor administration could disrupt the smooth running of the facility and jeopardise funding.
MANAGEMENT ACCOUNTS
With a Pay-and-Bill facility, payments to candidates are guaranteed and managed by the provider, so agencies aren’t usually required to produce management accounts.
However, most Invoice Finance companies will expect agencies to provide management accounts, at least on a quarterly basis. This allows the funder to monitor how the facility is being used, ensuring that contractors are paid on time and HMRC liabilities are met.
NON-RELIANCE ON IMMEDIATE PROFITS
Pay-and-Bill providers usually release profits (minus their fee) at the same time candidates are paid, based on timesheets rather than client payments.
By contrast, Invoice Finance companies advance 75–90% of the invoice value upfront. Depending on your margins, this may mean that only part of the profit is available in advance. If your agency relies heavily on the weekly cash flow generated from Pay-and-Bill profit payments, moving to Invoice Finance may not be the right step until your margins and reserves can comfortably support it.
DISCIPLINE WITH HMRC FUNDS
Most Pay-and-Bill providers handle VAT and PAYE liabilities on your behalf, either paying HMRC directly or holding back funds until payment is due.
When using Invoice Finance, however, this responsibility falls to the agency. Strong financial discipline is required to ensure VAT and PAYE liabilities are set aside and paid on time; otherwise, HMRC arrears can quickly become a serious problem.
UNDERSTANDING WHERE PROFITS SIT
One of the biggest adjustments for directors moving from Pay-and-Bill to Invoice Finance is understanding how and when profits are realised.
With Pay-and-Bill, profits are handed over alongside each payroll run, making it straightforward to see how much has been earned. Under Invoice Finance, however, profit visibility comes through your management accounts and balance sheet. This requires a more structured approach to financial monitoring but ultimately provides greater clarity and control once the process is embedded.
Once these processes are in place, recruitment agencies benefit from greater financial control and can achieve substantial cost savings compared with a Pay-and-Bill arrangement.
At MAYACHI, we have helped many recruitment agencies successfully transition from Pay-and-Bill to Invoice Finance, delivering significant savings in the process. We work closely with banks and invoice finance companies and can support agencies through the transition to ensure everything runs smoothly.
