How Invoice Finance is Transforming the Recruitment Industry
What is invoice finance?
Invoice finance is a type of finance for businesses that releases the funds tied up in unpaid invoices as they’re raised.
It’s often used by businesses that take on customers and invoice on delayed payment terms, such as the recruitment industry.
Invoice finance can be broken down into 2 main subtypes – invoice factoring and invoice discounting. There are key differences between each product type. To find out more, read our guide to invoice factoring vs invoice discounting.
What are the challenges faced by the recruitment sector?
The recruitment industry tends to operate entirely on delayed payment terms – a placement is made, an invoice is raised, and then payment is received within a set period, often 30 days.
A good recruiter will spend significant time and therefore incur a significant time cost when finding a potential new hire for a client.
With invoice finance, recruitment agencies can access the funds tied up in these invoices as soon as they’re issued, rather than waiting for the client to pay.
This immediate access to cash can be reinvested back into the business, helping agencies to attract more candidates and fill more roles.
Contract recruitment creates significant cash flow demands
Contract recruitment creates significant strain on business cashflow as contractors are generally paid weekly, with the recruiter responsible for payment.
Clients are then invoiced monthly, often on 30 day or more payment terms.
This means that a client is not likely to make their first payment until 8 weeks after you’ve paid out the first weeks wages and the contract is always in a cycle of being 4-8 weeks in arrears.
This can cause a real strain on even the most cash rich company, especially as the number of live contracts grows.
Invoice finance allows recruitment businesses to grow
Growing a contract recruitment book isn’t just a matter of hard work and skill – it’s a matter of funding the book and paying contractor wages on time.
Invoice finance gives your business the cash flow boost needed to ensure that cash flow isn’t an issue that holds you back.
Recruitment invoice finance facilities can grow as the business grows, meaning you’re never going to be held back by your bank balance.
The Advantages of Invoice Finance in Recruitment
The key advantages to consider for UK businesses in the recruitment sector are:
- Improved cashflow – By being paid upfront for work, rather than on significantly delayed terms, will greatly improve business cash flow.
- Ability to scale – Financing your invoices frees up significant cash and can take away one of the biggest barriers to scaling your business.
- Credit control support – Invoice factoring facilities include credit control services, meaning the strain of chasing payment is taken away from you, leaving you free to support customers.
- Can include bad debt protection – Bad debt protection enables you to still get paid, even if your customer fails to pay their invoice, removing the risk to your business.
The Disadvantages of Invoice Finance for a Recruitment Business
Of course, there are some disadvantages to consider. They are:
- It costs money – Even if you find the best deal, it still costs money to take out finance, which can impact your margins.
- Some facilities are disclosed – Some facilities are disclosed, meaning your customers will know that you’re using them. If this is a problem, opt for a confidential facility.
Keep reading – How to Ensure You Get Paid on Time in Business or What is negative cash flow?
Is Invoice Finance a Good Idea for Recruitment Agencies?
Yes, invoice financing is a good idea for recruitment agencies in the UK.
This is because it allows you to build your business and reduces the risk of cash flow problems.
For this reason, invoice finance is extremely popular with recruitment agency owners, and for those that offer a lot of contract recruitment, almost every recruitment business operates using a form of finance against their sales ledger, whether that’s debt factoring or confidential invoice discounting.
