The recruitment industry is all too familiar with the pressures of cashflow.
That's especially true if your agency hires temporary staff members and contractors. Your agency will need to pay them alongside other outlays, such as supplier charges and overhead costs. This can mean you will struggle at times to survive through extended periods waiting for your clients to pay on contracts. The result is the main cause of breaks in cashflow for a recruitment agency of any size or stature.
It doesn’t always matter how big or small you are as a company either. Usually, larger companies have higher numbers of clients and contractors, so the cash flow problem remains. There are also other reasons for cashflow problems, such as customer diversity. Some companies will engage in recruitment activity often whilst others will do intermittently. This can make payment landscapes and sales forecasts very unpredictable and difficult to plan around.
Probationary periods also play a factor. Most companies will expect a new staff member to pass a probation period before extending a contract or paying you for the service. This can be anything between a month and 6 months, depending on the firm. You will also have to wait this long before raising an invoice. Inflexible outgoings, such as PAYE and VAT payments, do not help with the matter either. Positive bursts of business growth can generate hefty bills before your payments even arrive.
Invoice factoring is an effective method of bridging the shortage in cash flow, with many recruiters turning to this low cost solution. The process provides frequent funds against unpaid invoices immediately after they have been issued (sometimes as much as 90% will be paid upfront). So with this method you can ensure invoices are paid quickly without landing your agency in debt. For this reason, invoice financing suits both growing agencies and well established organisations equally.
If you have very limited access to bank funding then this can often be the most cost effective solution, especially when compared with other facilities such as bank overdrafts. There are actually two options available to you – invoice financing and invoice discounting. They are both very similar with just one or two subtle differences.
As mentioned above, this service allows your agency to outsource outstanding invoices to a third party known as a funder. This will mean your company receives an immediate amount of cash, allowing you to close the gap between raising an invoice and collecting payment. The funder will then take payment from your clients on your behalf. You can also save a lot of money by using their credit control department instead of creating your own.
Invoice discounting is a little different in that your company remains in control of collecting payments from clients. You will still receive an immediate cash injection from the funder, but you will still chase your clients to clear their invoices. Why would you do it this way? To stay in control of the process and to maintain healthy working relationships. Using a third party to pursue payments can sometimes discredit the relationship built overtime through relaxed credit control procedures.
If you would like some more information on how to effectively manage the cashflow of your recruitment agency give us a call today on 0330 134 2826.
...or check out Simply Factoring Brokers