External funding is often required when a recruitment agency makes contracts or temporary placements to bridge the gap between when the client makes payment on 30+ day payment terms and when the candidates will need to be paid within 5-7 days. This funding gap can easily be filled with external funding either from a pay-and-bill company, factoring company, or invoice discount facility.
However, there are many different forms of external funding on the market, and it is advisable that these types of facilities are reviewed regularly to ensure that they are cost-effective and provide the maximum funding required.
Whenever you look to get an external funding arrangement, the potential provider will ask what your current turnover is and your potential turnover in 12 months’ time, a list of your current and potential clients that you will be working with and a want to know how your back-office processing will be completed.
In the early stages of a recruitment agency, a Pay-And-Bill service may be worthwhile to explore, which can provide the processing of timesheets, invoicing, candidate payments, credit control and full funding of the candidate payments. This may also provide the profit element before the client makes the payment. However, whilst these solutions may work initially, they can be very expensive as they are based on a percentage of invoice value, which will need to be reviewed as the company’s turnover grows.
Factoring can be the next step for an agency as external funding to provide funding on individual invoices (often between 80-90% of the invoice value). The agency would process the timesheets and invoicing and upload the invoices for funding, and the factoring company would credit control the invoices and complete a reconciliation of the debtors. These facilities can be cheaper than a Pay-And-Bill solution as the agency must do some of the administration, but there could be restrictions on funding on individual invoices, and there can be a loss of relationship with the client over chasing of payments.
When an agency gets to a larger turnover, the optimum funding solution is invoice discounting, which is not dissimilar to factoring except that the agency’s finance team needs to complete the credit control and reconciliation work. This facility still provides 80-90% of the invoice value as funding, but there is greater control over the collection process, and the fees are even cheaper than the factoring charges.
With a selection of facilities on offer, if the agency has an increase in turnover, a change in client base or improved back-office processes, then it is advisable to see if the current provider can better their existing offering or speak to other external funders to see what they can offer instead.
MAYACHI LTD provides help, advice and support to recruitment agencies requiring funding for their contract/temporary placements from a range of registered providers. MAYACHI LTD has many years of experience in helping to set up over 50+ invoice finance facilities to provide funding for UK and international contract/temporary placements in various industries.
