Invoice finance is a common funding solution for recruitment agencies making contract and/or temporary placements. This arrangement provides funding against client invoices, normally to a pre-payment of between 80-90% of invoice value which should be sufficient to pay the candidate until the client makes payment. Invoice finance companies like to provide funding against contract/temporary placements as they will have a timesheet attached which suggests that the client will make payment against the invoice raised.
However, invoice finance companies must go through their own due diligence before agreeing to a facility. This involves looking at the business and the current/future placements to ensure they are prepared to provide the facility long-term. Here are a bunch of reasons why invoice finance companies sometimes say “No” to contractor funding:
DIRECTORS’ POOR CREDIT HISTORY OR LACK OF ASSETS
As invoice finance arrangements are often secured against a personal guarantee, they will require the owners to have sufficient assets to cover the costs should the guarantee be called on. Additionally, if an owner has one or more CCJs or large amounts of outstanding liabilities this could dissuade some providers who may question whether this could be the way owners will use the funds lent to the agency. Being honest from the very beginning on your director’s credit history or assets is the best course of action.
CONCENTRATION OF CLIENTS OR EXPORT DEBT
Invoice finance companies must look at the risk of any deal and be aware that “putting all your eggs in one basket” is not seen as a good practice. This may mean having a large amount of debt with one client or having a greater percentage of debt overseas as this could be seen as risky should a client fail or stop trading with an agency. Protecting the debt with Bad Debt Protection or Credit Insurance can often mitigate this but it does come at a cost.
LACK OF BACK OFFICE AND ACCOUNTING PROCESSES
Running the day-to-day operations of an invoice finance arrangement is one of the creditors’ considerations when considering a deal. This involves reviewing how the timesheets are approved, the invoicing process, how the debt will be chased and whether the agency will provide management accounts. It is a good idea to consider using an outsourced provider who deals within the recruitment industry to box this aspect off.
POOR CONTRACT TERMS OR PAY-WHEN-PAID CLAUSES
The credit team will review client terms as part of their facility approval to ensure there is no reason why a client will not make or delay payments to the agency. Ban of assignment or pay-when-paid clauses are not something invoice finance companies like as this could mean the client may not make payment. Understanding why the client has these clauses in the contract and potentially having insurances in place to protect the debt could mitigate this situation.
POOR CLIENT CREDIT RATINGS OR INDUSTRY
Although the invoice finance company is contracted to the recruitment agency, the decision on how much will be funded against each invoice comes from the creditworthiness of the client. Running credit checks before a client is engaged will ensure that full funding is provided. It is also worth noting that some invoice finance providers do not like industries such as construction due to CIS and the fact that this industry has not fared well from an insolvency perspective.
Many of the points above can be mitigated if you work with the correct invoice finance provider to find solutions and ensure that they are addressed upfront.
MAYACHI Ltd has helped set up many invoice finance arrangements for recruitment agencies over the years with a variety of lenders and has faced many of these challenges. We make sure the facility meets the future demands of the business and is at the best possible cost whilst protecting the lender and agency at the same time.
