When starting to make contract or temporary placements, a recruitment agency may initially decide to use a Pay-And-Bill solution which looks after the client’s invoicing, funding of the candidate payments and distribution of profit minus charges based on when the timesheet is approved. These facilities work extremely well in the early days of a recruitment agency’s life cycle as the fees align with the early placement growth and the agency receives the profit as the candidate works instead of when the client makes payment. However, as a recruitment agency’s turnover grows in line with the increase in placements, these facilities can become very expensive and the requirement for upfront profit becomes less important.
The alternative to a Pay-And-Bill solution is to move to an invoice finance facility such as a factoring or invoice discounting facility with much cheaper charges and still provide the funding to pay the candidates before the client makes payment. Moving from a Pay-And-Bill solution to an invoice finance arrangement requires careful planning and there are several considerations to be factored into the transfer process. But how easy is it to move from a pay-and-bill solution to your own invoice finance facility?
THERE NEEDS TO BE A ROBUST BACK OFFICE AND ACCOUNTS FUNCTION IN PLACE
An invoice finance facility will not be providing the back-office functions that are currently provided by the Pay-And-Bill company such as timesheet management, client invoicing, contractor payments and credit control. This means the agency may need to take on an internal finance team or look at using an outsourced back-office provider which has a cost associated with it. There may also be an increased requirement on the company accountant as the invoice finance company may need monthly/quarterly management accounts.
THERE IS A FUNDING GAP BETWEEN THE FACILITIES
Most Pay-And-Bill providers will be funding between 85% and 100% of the debtor book total (depending on if they are withholding the VAT element) whereas an invoice finance facility will normally lend between 80-90%. This means that when the invoice finance company buy the debt from the Pay-And-Bill provider there needs to be sufficient funds to cover the amount previously lent. This may mean planning the exit date and having sufficient funds held back to cover the difference between the funding prepayments.
THE NEW FINANCIER WILL HAVE TO BUY THE DEBT FROM THE PAY-AND-BILL PROVIDER
Most financiers will charge a service fee on the whole debtor book that they are purchasing. This means that an agency may be paying a service fee twice on any invoices that have already been uploaded to the Pay-And-Bill company. If the transfer can occur after most payments are received from clients or before a large invoicing run, this can reduce these charges significantly.
THE AGENCY WILL BE MANAGING THE CONTRACTOR CASHFLOW
The largest change between a Pay-And-Bill provider and an invoice finance facility is that the payment to the candidates is made from the agency’s back account. This is because the invoice finance company will deliver the drawdown to the agency bank account for the back-office team to decide which candidates are paid. This process takes some cashflow management to understand how much funds are available and how much should be drawn down on each occasion.
CONTRACTOR PROFIT IS SHOWN ON THE MANAGEMENT ACCOUNTS NOT WHAT IS RECEIVED ON TIMESHEET RUNS
The largest mindset change for a recruitment director between the two facilities is understanding where the profit is held. On a Pay-And-Bill solution, the agency will receive the profit generated minus the charges based on when the weekly/monthly timesheets are received. However, as the invoice finance provider will provide a prepayment between 80-90% of the debtor balance, some of the profit will not be received until the client makes payment. The only way to track this profit element is by using management accounts instead of the money coming into the bank account each week.
If the transfer between the Pay-And-Bill company and the invoice finance provider is managed well, then the agency can see a significant saving on their funding costs and often have greater control over their candidate payments.
When MAYACHI is approached by a recruitment agency to provide its advisory services, one of the main review areas is the current back office and funding solution used to manage the contract/temporary placements. We have relationships with many outsourced back-office providers and invoice finance companies to help navigate the quotation process and assess the cost savings that could be made by the agency. We’ve also had some great success stories where recruitment agencies have experienced cost savings of over £10k per annum!
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