When a recruitment agency requires funding through an invoice finance arrangement (often when making contracts or temporary placements), the agreements can contain a lot of jargon that must be understood before the facility goes live.
One point that can sometimes catch agencies off guard is the concentration limits imposed by invoice finance companies. These limits must be adhered to; otherwise, the agency may have some debts disapproved, which could impact cash flow.
There are often two types of concentration limits shown within an invoice finance arrangement:
CLIENT CONCENTRATION
This is often reflected as a percentage of the overall debtor book value which can be with one client either at any one time during the month (often with Factoring) or shown on the end-of-month reconciliation (often with Invoice Discounting). This concentration limit prevents the agency from having one client who dominates the ledger and could pose a risk should that client default on payment or go bust.
EXPORT CONCENTRATION
This is often reflected as a percentage of the overall debtor book value which is billed to overseas clients either at any one time during the month (often with Factoring) or shown on the end-of-month reconciliation (often with Invoice Discounting). This concentration limit prevents the agency from having too much of its debt outside of the UK and could pose a risk to the invoice finance company potentially being able to collect funds if there is a default on payment.
There may sometimes be a third concentration limit if the agency is being funded based on its permanent placements. In such cases, the provider may require that permanent invoicing remains below a certain percentage of the overall debtor book value. This is because permanent invoicing often needs to be supported by a contract/temporary ledger to justify the provision of funding.
While these concentration limits may seem like a restriction on an agency’s ability to grow certain clients or expand into international markets, they are designed to protect both the agency and the invoice finance company from putting “all their eggs in one basket.”
Often, these limits can be negotiated with the invoice finance provider. If the agency has a sufficient credit limit under a bad debt protection or credit insurance policy, the funding provider may be able to exceed these percentages and provide funding for those debts.
Alternatively, if these limits are exceeded, an invoice finance provider may impose lower prepayments on the debt. This ensures that, in the event of issues with certain clients, they have not provided full funding, thereby maintaining a financial buffer.
The best approach is to engage with the funding provider as early as possible if there is a risk of funds being withheld due to these limits. This allows for discussions on potential workarounds to avoid future cash flow restrictions.
MAYACHI Ltd has set up many invoice finance arrangements over the years and ensures that the facilities that are being provided do not have restrictions for the agency on their growth due to concentration limits. MAYACHI also helps the agency to overcome these limits if they do restrict funding by looking at credit limits and external insurances to give the invoice finance provider the peace of mind to provide the required cashflow.
