Pay-And-Bill solutions are a great way for start-up and smaller recruitment agencies to place temporary or contract workers where the funding and administration processes are being looked after by an external provider.
However, these types of funding solutions can become very expensive should the company turnover increase significantly.
The other alternative for a recruitment agency would be to consider invoice finance which provides the funding at a significantly lower cost but does require the agency to manage the back-office element of the placement.
There is a fine balance between the two solutions but if done correctly, an agency can save thousands of pounds and have great control over the back-office and payment processes.
These are the considerations when looking to move from a Pay-And-Bill solution to invoice finance:
CALCULATE WHEN IS BEST TO TRANSFER OVER
Pay-And-Bill services have a place within the recruitment industry which is often when your annual turnover is less than £500k per annum. Once an agency has a turnover of above £500k it may be a good idea to see whether invoice finance is a better option from a cost perspective. That tipping point varies per agency and depends on whether the business is making contract or temporary placements and whether the candidates are working full-time or ad hoc. As part of the calculations, there is also the cost of the candidate administration such as timesheet management, invoicing, candidate payments and credit control along with invoice finance management.
ENSURE YOU HAVE THE CASHFLOW TO PAY OUT THE PAY-AND-BILL PROVIDER
One of the biggest differences between Pay-And-Bill and Invoice Finance is the funding model. The Pay-And-Bill solution will always pay the contractors on time each week and distribute the profit at the same time so could be funding up to 100% of the invoice value. However, Invoice Finance will fund between 75-90% of the client invoice value which should still be enough to fund the contractors, but the profit may come later once the client makes payment. This means that when moving from Pay-And-Bill to invoice finance there may need to be some funds provided by the agency to pay off the Pay-And-Bill provider during the transfer.
CONSIDER THE TAKE-ON AND SET-UP FEES
When an invoice finance arrangement is set up, there will often be set-up fees to cover the registration of debentures and internal audits before the facility is set up. Also, an invoice finance provider may charge a take-on fee which is the service fee multiplied by the amount of debt they are purchasing. These additional costs need to be considered when looking to see whether there is a cost saving to be made
ENSURE THAT THE BACK-OFFICE PROCESSES ARE ROBUST
Pay-And-Bill providers will not only provide the funding for temporary/contract placements but will also look after the administration services. However, when using invoice finance these services need to be completed by the agency such as timesheet management, invoicing, contractor payments and credit control. It is often best to consider using an outsourced back-office provider who can manage this process instead of hiring an internal resource which can be more expensive.
UNDERSTAND WHERE YOUR PROFIT SITS
One of the hardest things for agency directors to understand when they move from a Pay-And-Bill provider to invoice finance is where their profit is. As the agency director has been used to receiving their profit each week minus charges, they can see the profit and know it has been received. However, when using invoice finance, this acts like a revolving overdraft facility and the profit is part of the availability of funds. This means that the agency director should be looking at their management accounts to know what profit they have generated and their balance sheet to know how much they have available to spend.
MAYACHI has worked with several recruitment agencies to review their current solution to see if there is a better way of administering or funding their temporary/contract placements. This may be moving the agency from a Pay-And-Bill solution to its own invoice finance solution or moving from one invoice finance company to a more cost-effective facility. MAYACHI helps to source the correct solution and then helps with the transfer process to ensure that the cost savings can be delivered as soon as possible.
