Invoice finance is a great way for a recruitment agency to receive cash into their bank account before a client makes payment based on the debtor book. This is mainly a requirement for contract and temporary placements as the candidates will need to be paid prior to the client making payment.
This type of facility ensures that the agency are not using their own funds to pay contractors while they wait for the client to make payment, especially if there are extended payment terms or the client pays late.
However, due to cashflow constraints, some recruitment agencies may feel there is a need to also fund their permanent placements even though there is no requirement for the funds except to pay business costs, staff or even the directors themselves.
Whilst this type of funding can appear to be helpful, when the agency weighs up the amount being funded against the costs, it may be a better option to instead get a company loan at a much lower rate of interest.
An example of this is an agency who are raising £40,000 of permanent invoicing each month and are getting a prepayment of 60% so they can borrow £24,000. This may be at a rate of 3% of invoice value which would be £840 per month.
However, if they raise the same £40,000 per month and get paid within 30 days by their client, they are still only borrowing £24,000 from the invoice finance company on an ongoing basis.
So, to borrow £24,000 over 12 months will cost them £10,080 (12 months x £840) which is the equivalent of a 42% interest rate!
An agency making permanent placements would be better off negotiating shorter payment terms with their clients, improve their internal credit control processes and only pay commissions to staff once the client makes payment on invoicing to aid cashflow.
If the agency does require funds in advance, then it would be better to look at a bank loan instead as the interest payable would be much lower than using an invoice finance arrangement.
MAYACHI Ltd has worked with several agencies who have used permanent funding from invoice finance and instead made recommendations of other methods of providing the required cashflow. MAYACHI has then worked with the client to help them review their cashflow requirements and aided them in extracting themselves from requiring the loan at the end of the period
