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How to manage finance for recruitment companies

The recruitment industry is one of those industries where cashflow issues can quickly cause huge problems for recruitment agencies, especially if they are small in size. If you type ‘recruitment agency’ into Google you will see that there are thousands of results as there are many different agencies of all sizes, industry types and business niches. A lot of recruitment companies also only recruit on a sporadic basis, which means they don’t have a steady stream of income to rely on, which makes finance for recruitment companies so difficult.

It ls quite bizarre when you think about it, because the recruitment industry as a whole added £32.2 million to the UK economy last year, with the majority of this money coming from those businesses who dealt with contract or temporary workers. So why is cashflow such an issue? Well, to really understand the issue we need to take a good look at what the funding cycle looks like for an average agency:

Average Funding Cycle

Day One – Agency places a temporary worker at a company

Day Eight – Temporary worker has finished 7 day’s work and provides agency with a timesheet. Agency then raises an invoice to the company which requires them to pay for the worker’s time.

Day Thirty-Eight Plus – Once the company has received the invoice, this may take them anywhere from 30 days upwards to settle. Meaning the recruitment agency has to find other money to pay the temporary worker what they are owed, leaving them out of pocket until the invoice is settled.

As you can see, keeping cash flowing through a recruitment business on a regular basis can be a bit of a challenge. Many companies work on a 30- 60- or 90-day invoice cycle, which means that income is not reliable or steady. This means that a profitable recruitment business can quickly turn unprofitable as there is a limited amount of capital available to meet the payment deadlines which have been set internally for temporary and permanent placements, which will also restrict the ability of the recruitment business owner to expand their business as well.

The other important thing to remember is that cashflow is not just needed for paying workers, but for rent, the internet, telephones and other overheads as well.

How can cashflow issues be addressed?

The key to any successful business is always good planning and accurate forecasting, but there are a number of finance options available as well. A lot of businesses tend to gravitate towards banks for finance at first, as they already have an account with them and so they can look at things like business loans and overdrafts.

A short-term business loan is one option as this will provide the recruitment company with a set amount of money which they will replay over a period of time at a set rate of interest. This is one of the most commonly used types of funding, but it does lack a degree of flexibility. The other traditional option is the extension of your business overdraft which can help to cover many unforeseen eventualities but can often be an expensive way to fund your business as you may be hit with charges for using it often. You may also find that with a loan you don’t have the cashflow to make the payments regularly in the long run, and this can lead to you defaulting, and ending up with a poor credit rating as well.

This has led to the increase in popularity of invoice finance recruitment companies as this is a fast and flexible way for companies to raise some much-needed cash against unpaid client invoices so that you can pay your wage bill on time. You can release the value of an unpaid invoice within 24 hours sometimes which will not only allow you to unlock the funds earlier than expected but also transfer the payment delay onto the provider of the finance and out of your company. But how does invoice finance work?

Invoice Finance for Recruitment Agencies

Invoice finance for recruitment agencies tends to be more useful to smaller agencies who have limited access to bank funding and also lower invoice values. It can help by releasing up to 95% of the value of an unpaid invoice once it has been issued by the agency to a client, with the rest being paid once the client has settled the invoice (minus a fee for the financier).

As part of the invoice factoring agreement, many financiers will also offer to manage payroll administration and credit control on behalf of the agency, meaning that this frees up the employees that normally deal with this to work on other things.

Invoice finance and factoring are great ways for recruitment agencies to bridge their cash-flow gap allowing them to pay their workers and other operating expenses on time, without having to wait for their invoices to be settled.

To find out more about how to successfully manage you cashflow, and invoice finance recruitment, please call 0161 818 9670 or email enquiries@finance4recruitment.com to talk to one of our professional advisors.

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