The Number One Reason Recruitment Start-ups Fail

Turnover is vanity, profit is sanity but cashflow is a crunching blow of reality.

Without the right injection of working capital or sufficient planning agencies are effectively signing their own death warrants.

Cash is King!

Access to reliable finance is even more of a lifeline for recruitment agencies placing contractors and temps, as the nature of the game relies on bridging a shortfall between paying contractors weekly and receiving payment from clients further down the line.

Research from recruitment finance provider Sonovate shows that average debtor days are typically 42 days, with major clients often exceeding the three month crossover into bad debt and the average year old agency being owed £52,000 in 2014.

The truth is that agencies, if they can even secure finance as a "high-risk start-up", are continuously let down by restrictive funding from the banks and limp incentives like the Prompt Payment Code from the Government.

Growing Beyond Your Means

Expanding too fast without the suitable finance to accommodate the funding gap can also pull the trigger on a successful start-up, as the more contractors an agency places, the greater the strain on cashflow and the more crucial a stronger bridge is.

It comes down to two fundamentals. Planning and funding.

Has your agency considered the outgoings and additional time management involved in rapid expansion? If the increased workload means your time will then be tied up in the additional administration of contractors, then your profit margins are going to move fractionally.

Have you also got suitable finance in place to accommodate a rapid expansion, whereby the additional strain on cashflow is not going to poke holes in your pockets.

The Solution?

Financial packages for recruitment agencies often come with financial services such as back-office systems, payment management and this kind of thing, the main lesson for agencies is negotiating the best fit for their agency.

One of the common pitfalls new agencies fall foul to is not asking the right questions before they secure their finance, they then end up tied into a finance contract for 18 months that doesn’t reflect the cashflow problems they're going to meet.

Cash is king, which is why start-ups that succeed are the ones that do the right planning and secure the best funding solution.


Calum is the Content & Marketing Executive for Sonovate. Follow @Calum551

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