How is the RPO Funding Crisis affecting Invoice Finance?
As invoice finance providers we know that many suppliers have to pay their contract workers and agency before their clients have paid them. In the past a lot of lenders within our industry have been happy to fund the suppliers cash flow through the use of invoice factoring and discounting, as long as the suppliers had a good credit rating. However, with the recent recession leaving some lenders believing the recruitment sector has been adversely affected there has been a bit of a downturn in lending figures.
Risks Associated with RPO Solutions
Before we look at the problems associated with funding an RPO solution, we should take a quick look at the risks of actually using an RPO solution in the first place. The most common risks associated with RPO solutions are:
- Expecting too much from your RPO vendor. While they may be able to offer you resource that is specialised in competancies that you just don’t have within your business already, and also suggest solutions that you may not have already thought of, they are not miracle workers. They will not be able to meet every need of your business.
- Outsourcing a problem that you don’t know about. Using an RPO is never a good idea if you are thinking of it as a solution to an ill-defined recruiting strategy or to fix a defective process. You must address these inherent issues before you hand them over to someone else as they cannot fix a problem that has not been already identified.
- Overestimating the cost savings you will make. We talk a lot about how an RPO can save you money in the long run, but this does not mean it is not a costly solution to begin with. Therefore your primary goal for working with an RPO company should be an improvement in the identification, vetting and hiring of quality employees, with the cost saving being an additional benefit which would be nice to have.
- A lack of cultural fit. If your RPO company does not mirror your companies core values, then this could be a bit of a disaster, Ideally, you want to work with a company who will not only complement your corporate culture, but also improve your processes as well.
- Underestimating the amount of time needed. The process associated with working with an RPO can take up to a year to put in place depending on how complex your existing processes are. Focus on communication and cooperation to smooth the process and speed it up.
Risks Associated with RPO Factoring
Some recruitment factoring businesses in fact, have started to realise that there may be a risk associated with concentrating on managed services and RPO companies as they tend to operate on narrow margins and can have poor credit ratings. There have also been several RPO business failures reported in the news, the most famous of which is the US company Chimes. In the past staffing invoices would usually be spread over multiple clients which meant that if one client defaulted there would not be much of a problem. However, in some sectors monopolies are beginning to develop which is leading to larger risk profiles for some lenders.
Some RPO businesses are also compounding this risk by introducing a ‘pay when paid’ clause into their contracts and pushing out payment terms which mean that lenders are now being offered security which is of a lesser value than in the past. Another complication arises from the fact that there can be three different companies involved in just one timesheet. As many RPO companies are used to just dealing with the traditional supplier-client relationship, having three different companies looking for invoice finance on each time sheet can be a bit daunting for them.
As a result of these risks, some agencies are finding that their funding is being withdrawn which could lead to them being unable to fulfill their payroll obligations in dire circumstances. After all, once one link in the funding chain fails, the rest will no doubt follow. If workers are not paid on time, then they could claim against the client as well, as they may believe that at the end of the day the client is their employer. This means that clients are now facing the same risks, even though they may have already paid their supplier.
What is the Answer to this?
There is no easy answer to resolve this situation unfortunately. In fact, if anything, it is likely to start getting worse due to the increase complexity of tax issues relating to umbrella companies and RPOs when used to supply contract and agency workers.
All is not doom and gloom though as long as you partner with a company who understand the risks associated with RPOs and can answer questions such as how to pay contractors? Contact the team at Finance4Recruitment today for a more in-depth conversation.