Financial Solutions for Recruitment Businesses

Generating profit to facilitate growth is the principle objective for most businesses and is key to success. However, in a world where cash is king, sufficient working capital is vital to stay afloat


Recruitment at large

According to the latest statistics published by Cobweb Information and the Recruitment and Employment Confederation, there are 28,000 recruitment agencies registered in the UK accounting for 1.3 million temporary placements each day.

The volume of work involved in finding, vetting and placing candidates cannot be underestimated. In addition to developing an efficient and reliable workforce, new and more established recruitment businesses also share the common task of having to ensure a consistent influx of new recruits and clients.

Planning for success

It can be an uphill struggle to gain a foothold in local markets. in addition to establishing a robust and skilled workforce, and in the event of securing larger contracts, recruitment businesses also need to have sufficient working capital to cope with increased demand.

The larger and more complex an organisation is, the more bureaucratic and longer it can take to receive payment. Irrespective of how long clients take to settle invoices, candidates still need to get paid on time.

It is great if a business has surplus cash reserves to act as a contingency. However, if this is not the case, unexpected growth whilst showing all the right signs in terms of productivity and potential, can also place undue strain on cash flow.

Recruitment businesses with ambitions for growth and real-life prospects of doing so need to plan ahead for such eventualities. Taking into account the amount of finance required and where additional funds will come from.

Finance for recruitment

There are various financial instruments designed to enable businesses to function and grow. In addition to term loans, bank overdrafts, directors’ loans and crowdfunding there are also several asset-based financial solutions for business worth considering.

Invoice Factoring

Invoice factoring is where businesses sell trade receivables (outstanding invoices payable) to the value of the amount they would like to borrow at a discount, to a Factor (financier).

The Factor then works on behalf of the business to manage the sales ledger, recovering funds that were advanced, when invoices are settled. There are two main types of factoring Recourse and Non Recourse Factoring.

Recourse Factoring

Recourse factoring is where a company sells trade receivables with an agreement that any unpaid invoices will be bought back. In such, the Factor does not take on the risk of unpaid invoices. This benefits the lender in that they are able to pursue the borrower should an invoice not be paid. This type of factoring can also prove to be more cost-effective for the borrower.

Non Recourse Factoring

With non-recourse factoring, funds are advanced in the same manner as recourse factoring, however, as the name suggests, the Factor (lender) does not have the right to pursue the borrower, should any invoices be unmet. As non-recourse factoring presents a higher risk to lenders, transaction fees can be higher.

With both types of factoring, checks are made regarding the creditworthiness of a business and its customers, before taking on the risk. These checks will usually include; know your customer, Anti Money Laundering, directors search, business assessment, and analysis of the business’ accounts and debtor book, wherein the amount lent is usually based on the value of the trade debtor book.

Invoice Discounting

Invoice Discounting (sometimes known as confidential invoice discounting) acts in a similar way to Invoice Factoring. Lenders advance cash sums to businesses based on a percentage of its trade receivables, the cash advance is then repaid when trade receivables have been recovered.

Lenders will usually take some security for the amount a business is looking to borrow in the form of an all asset debenture. The main difference between invoice discounting and factoring is that unlike factoring, lenders do not take on the responsibility of recovering trade receivables on behalf of borrowers.

Whilst the borrower is able to benefit from the fact that the invoice discounting facility is confidential, they still have the task of recovering trade receivables from their customer base. When a customer settles an invoice, the money is paid into a confidential trust account that appears as though the customer is paying the supplier directly.

One of the benefits of invoice discounting is that unlike bank overdrafts or loans, which are set at fixed amounts, the level of funding that can be borrowed grows with the business.

As with Invoice factoring, there are two types of invoice discounting, recourse and non-recourse invoice discounting. Non-recourse invoice discounting can offer added protection against bad debt, however, may prove to be more expensive than recourse invoice discounting. In order to attract invoice discounting, lenders must be assured of the creditworthiness of the business and its portfolio of clients. Unlike invoice factoring, invoice discounting can be offered for individual invoices rather than the entire sales ledger of the business.

Free Finance Assessment

Here at Newable Finance, we pride ourselves on endeavouring to provide our clientele with a fair and transparent service to accommodate growing needs.

If you are looking to grow your business, you may be able to benefit from our Free Finance Assessment. Designed to help you discover the best possible financial solution for your business. Find out more.