Recruitment industry Finance: Time for growth?
Spring has sprung - albeit with a rather white, cold start- and with the new season comes thoughts of new growth and regeneration.
But if you are about to launch a new Recruitment agency or are looking to grow your existing business, like an unexpected snowfall, nothing can destroy the shoots of growth quicker than a lack of cash flow.
Managing cash flow is essential to the success of any business, but by its nature, the Recruitment sector is particularly affected by the issue of providing services to clients with a long payment cycle.
Across any sector, many clients’ Recruitment patterns are sporadic and so fail to provide a steady and reliable stream of income. In addition, agencies that hire temporary staff and contractors will need to pay these workers weekly as well as their usual overheads. While invoices are usually issued to clients the moment a candidate is placed, with many clients enjoying favourable payment terms, this can result in a 30, 60, or even 90-day wait for payment. This creates an unavoidable cash flow issue for agencies of every size.
Clients who then compound this by failing to pay on time or in full can quickly undermine a profitable business, limiting the availability of capital to meet payment deadlines as well as restricting the ability of the Recruiter to grow the business.
Securing a steady income is a priority for any agency so Recruiters need to be realistic about how and where the money will come from. Fortunately, there are options available to agencies to overcome this hurdle.
Many start up Recruitment agencies naturally look to their current banks for finance as they already have history and credit with them. Directors may take out short-term business loans, dip into overdrafts or take out credit cards to fill the cash flow gap, particularly during the early years of the business. However, loans and credit cards carry risks. Late payment fees, interest charges or defaulting on the loan, which can result in the business being damaged by a poor credit rating.
In contrast, invoice finance (factoring and invoice discounting) is a fast and flexible source of cash, allowing Recruiters to raise finance against unpaid client invoices. A factoring company can advance funds tied up in an unpaid client invoice within 24 hours of it being issued, often up to 100%. This means that you will get the money before the client pays.
Invoice Funding Explained
Invoice funding is ideal for businesses that have customers on long payment terms, or who often pay late. It can also help businesses who want to take on new projects without taking on extra debt.
There are two types of invoice finance products: factoring and invoice discounting, the biggest difference between them is who collects the customer payments. Each allows you to release a large proportion of your invoice value within 24 hours of its issue. Then, once your customer has made their payment, the remaining balance is paid to you, minus any fees.
If you would like to remove the funding and administration burdens from your recruitment business, please call Outsauce on 0330 100 8695 or email Newbusiness@outsauce.net for free and confidential advice from one of our funding advisers.