Every recruitment agency hopes that when they make a placement, the invoices raised to the client will be paid within the payment terms set out in the signed contract.
Whilst permanent placements have no significant lay out of costs associated with the placements, client invoices for contract and temporary placements will include the amount of money paid out to the candidate prior to the client invoice being paid.
As such there is a greater risk to the recruitment agency on these types of placements if the client does not pay or if the client goes bust prior to payment as often they would have used funds from a funding provider or used money within the company.
Whilst most clients will make payment within the contractual terms, there are occasions where clients do not make payment or go into administration before they invoices can be cleared.
To combat these scenarios, a recruitment agency may choose to take out insurance to cover the invoice amount due should there be an issue with payment from the client. The two types of insurance on offer are:
BAD DEBT PROTECTION
This type of insurance is often provided by invoice finance providers as part of their funding arrangements and covers a portion of an invoice value (often after the deduction of an agreed excess or 90% of invoice amount) up to an approved credit limit should the client go bust.
CREDIT INSURANCE
This type of insurance is often provided by credit insurance companies directly and covers a portion of an invoice value (often after the deduction of an agreed excess or 90% of the invoice amount) up to an approved credit limit should the client go bust or if the client can’t pay/won’t pay the invoice due.
Both insurances should be assessed by an agency to see what risk the clients pose in both scenarios especially if a client might not go bust but has a history of being a poor payer. This can be prevalent in certain industries such as construction where there is a reputation that payment of invoices can be delayed or the client going bust before payment can be made.
If a recruitment agency is dealing in the public sector, then there is no need for any insurance as this will not be covered and these debts are backed by the government.
Credit insurance can often be a good way of helping to collect funds from clients should they default on their payment terms as the credit insurer can pay out on invoices and they will pursue the client for the unpaid debt.
Bad debt protection is often priced on a percentage of invoice value (including VAT) whereas credit insurance is often priced as a fixed amount for 12 months.
When looking to gain funding from an invoice finance provider, it may be prudent to get a price for the bad debt protection that they may include as well as approach a credit insurance broker to also get a price for credit insurance and to see what credit limits they can achieve.
MAYACHI Ltd has worked with many agencies when setting up their funding arrangements to assess whether bad debt protection or credit insurance should be taken out. MAYACHI has relationships with reputable credit insurance brokers to ensure that the pricing and policy gives the greatest amount of protection, and the agency knows of their responsibilities when it comes to maintaining the facility should it be required.
