Guide to Invoice Discounting for Recruitment Agencies
It is probably fair to say that invoice discounting is probably the simplest form of invoice factoring there is. It tends to be aimed at larger companies who are already well established and who have a fairly high turnover, and the purpose of it is to finance their entire sales ledger.
Invoice discounting tends to be a confidential service which means that the customers of your business will not know that you are using this service. This is made clear when you look at another common name used for this service, which is “confidential invoice factoring.”
The main requirement when it comes to invoice discounting is that you have customers who are deemed to be creditworthy, because the nature of this type of factoring means that the lender is less involved in the whole process and so the risk for them of late payment is high.
What are the pros and cons for invoice discounting?
One of the main pros of invoice discounting is that it is very often found to be the cheapest form of invoice factoring, and because of its confidential nature it allows you to carry on dealing with your own customers on a daily basis. It is also specifically designed for larger companies, such as finance recruitment agencies, as these tend to have longer payment terms due to their size and the fact that they tend to deal with larger businesses.
The main downside to discounting is that it is a great service that isn’t provided to smaller companies or even start-ups, so they would have to opt for another kind of invoice factoring instead. The other thing to consider is that even if you do have a larger business, you may still not be able to take advantage of invoice factoring as your lender may feel that your credit process is not robust enough to guarantee that they would receive payments on time.
What information do lenders base their decisions on?
If you have read any of our blogs before this one, you will know that lenders tend to base their decisions on a wide variety of things. However, because invoice discounting is based on your debtor’s book then it is a bit more straightforward than other types of finance.
The first criteria that your lender will probably look at are usually related to the financial health of your business as a whole. They may ask about your turnover, how much you are currently owed and by who, how many invoices you issue on average in a month, and also the number of clients you have. These questions are all aimed at helping them to decide whether your business is big enough for you to qualify for invoice discounting, or whether invoice factoring would be a better option for you.
Turnover and Profit
To qualify for invoice discounting your company will probably have to be turning over at least £250K (depending on your lender) whereas for invoice discounting it tends to be around the £30k mark. Your lender will also be interested in profitability as well, as if your sales have been declining or you are making a loss they will be less likely to offer you a finance option.
The industry you are in will also have an impact on the type of finance you are offered as well with some industries being classed as high-risk due to their payment timeframes and invoicing standards. The construction industry, for example, tends to have payment terms of 60 days or more as many projects will take months or years to complete. This means invoices tend to be broken down into staged payments, which are smaller invoices paid throughout the project, which many lenders feel is too risky to offer finance on.
Recruitment is another industry which is sometimes deemed as high risk due to the fact that even when an invoice has been settled, it can still be clawed back by the client if the placement doesn’t work out – which can affect the value of your ledger dramatically.
Lenders may also want to know a little more about your customers as this gives them a better idea of the whole amount owed to you, how reliant you are on how many customers, and also what your average invoice amount is. If you are heavily reliant on one or two big customers, for example, the invoice finance facility you are offered will probably differ from a company whose invoices are spread more evenly across a greater number of customers.
Invoice discounting does not include any credit control services, so your lender will probably want to see that you have built up a solid track record of being paid on time and in full. If a large amount of your customers pay late or don’t pay the full amount, then this will identify that you have a weak credit control process which is causing you cash flow issues. You can help to improve your chances of being accepted for finance if you invest in some accounting and payments software, as this will show your lender that you are taking an organised approach to your customer collections.
As well as the importance of being paid on time, it is also really important that your clients do actually pay. Unfortunately, bad debt seems to be a fact of life for many businesses these days, and it can be really hard to avoid. Lenders will want to know what percentage of your debt is bad debt, and whether this number had got better or worse over the last few months.
As you can see, there are a lot of things that lenders take into account when before they offer you invoice discounting – particularly if you are in the financial recruitment services industry.