Maintaining enough cash in the company to meet all of your costs is the main issue for any entrepreneurs running a Recruitment Business beyond the start-up phase.
As your business grows you will start to deal with multiple payment cycles with your suppliers that may not coincide with when your client pays you making it nearly impossible to meet day-to-day expenses. As a result your lack of instant access to cash begins to starve the growth of your business further putting your survival at risk.
Finding cash flow solutions is therefore vital to keep your business growing. Recruitment in a Box explains how Factoring/Invoice Discounting can help you to turn your invoices into the cash you need.
What is the Difference between Factoring and Invoice Discounting?
Factoring and Invoice Discounting are both financial services that can release the funds tied up in your unpaid invoices, involving a provider who agrees to advance money against outstanding debtor balances, i.e. what your clients owe you.
The essential difference between Factoring and Invoice Discounting lies in who takes control of the sales ledger and responsibility for collecting payment:
With Factoring, the provider takes the role of managing the sales ledger, credit control and chasing customers for settlement of their invoices.
With Invoice Discounting, your business retains control of its own sales ledger and chases payment in the usual way.
Another difference between Factoring and Invoice Discounting is in the area of confidentiality:
With Factoring, the customer settles their invoice directly with the Factoring company; so customers are more likely to be aware of your Factoring arrangement.
With Invoice Discounting, your customers still pay you directly; there is no need for them to know that a third party is involved.
As there is more work required by the provider in providing a factoring service the costs of using this are higher than that of one that provides invoice discounting.
Types of Factoring/Invoice Discounting
There are 2 main types of facilities available in the market.
Recourse: This is the most common, readily available and cost-effective type. Here, the factoring company funds your invoices but requires you to provide a refund on any invoices that remain unpaid past a certain amount of time. Since the business owner assumes the risk with recourse factoring, there is a wider range of competitive rates.
Nonrecourse: This type of factoring releases the entrepreneur from any liability for delinquent accounts. Since the factor is willing to take on substantially more responsibility and legwork, this type of factoring is more costly.
No matter what path you choose for your business, the fundamentals are the same.
The benefits of Factoring/Invoice Discounting for your Recruitment Agency?
Factoring and Invoice Discounting can help:
- Get a large amount of your invoices paid up front to fund the costs and growth of your business
- Fund the salaries of your short and long term temporary staff and contractors
- You can access this additional cash flow you need on a daily, weekly, bi weekly or monthly basis.
- Reduce your administrative costs
- Process payroll, PAYE and NI
- Outsource your credit control function allowing you gain valuable time to focus on the grow of your business
- Give you precious information about the credit standing of your customers.
- Limit bad debts if you use non-recource factoring/invoice discounting
How to choose a Factoring/Invoice Discounting Company?
There are different types of providers available in the market. All providers are different in terms of criteria and capabilities. Below are a few point to consider when selecting a provider.
1- What do you really need?
Before approaching a provider, it is important that you fully understand what you are looking for, in terms of your requirements.
- Do you want a provider to fund your temp invoices and/or your perm invoices?
- Do you need a service that covers all of your outstanding invoices upfront or only a partial payment?
- Do you want to keep receiving payments form your clients?
- Do you want the factoring company to collect the payment of your clients?
- Do you want to remain responsible if a customer doesn’t pay?
Some providers specialise in a few industries whereas others are more of a generalist. Selecting a company that understands the recruitment industry is an essential factor to consider as they will be more likely able to understand your business and priorities.
On a similar note as a start-up business you want to find a provider that specialises in supporting new ventures. Not all providers are keen to work with start-ups due to the potential higher risk so either choose not to or charge higher fees to put you off. There are some excellent providers who specialise in start-ups though so do seek them out.
3- The Terms
Make sure you get clear explanations of the terms and that they have been tailored to your specific needs. Take your time to read the details and fully understand the contract length, fees, notice period etc…
- What percentage of the invoice value will be funded for perm and/or temp?
- What factors influence this percentage?
- What will happen if I want to leave?
- How will client concentration affect me?
- Will I need to provide personal guarantees?
- Is my industry type deemed a higher risk?
- What is expected of me?
4- The Credit Control Process
If you opt for the Recource facility then you need to understand how the provider will conduct the credit control service on your behalf. Cover all eventualities and ask as many questions as you can!
- How the factoring company will introduce itself to your customers.
- Will you get a dedicated credit controller?
- What will happen of you client does not pay the provider? What is the process for taking further or legal action against your clients if required?
- How does the Provider keep you informed on all these matters?
The provider will charge you a monthly fee, depending on the service options you have selected, which is generally a percentage of the invoices submitted for funding during the month.
The higher the risk that they deem your business to be, and by association the clients that you work with, the higher the fee will be.
Any extra protections that you ask for or extra services will also have an impact on the price that you pay.
There are a large number of Providers out there offering factoring/invoice discounting services. Whichever provider company that you choose to work with you need to make sure that the company is flexible and will agree to review your facility as you grow.
For advice on how to choose the right one for you please contact our Recruitment Industry Experts at Recruitment in a Box on 0203 4173101 or email firstname.lastname@example.org with your question.