Recruitment Agency Funding – getting it right when Starting Up
Despite Brexit and economic uncertainty, recruitment entrepreneurs are still looking to join the market
The recruitment industry shows no signs of slowing down. Despite Brexit and economic uncertainty, recruitment entrepreneurs are still looking to join the market. According to the REC (Recruitment and Employment Federation), industry turnover reached £38.9 bn in the year to March 2019. In March 2019 there were 31,140 firms in the industry, up 2% from the previous year.
Start the way you mean to go on
What do many of these new recruitment companies have in common? They will be looking for a recruitment agency funding solution which can help them not only start up but grow at a pace that suits them. The good news is that there is a lot more choice than there used to be. The British Business Bank reported that more than 52% of small businesses are now familiar with financing options other than their bank. Just a few years ago that figure was around 35%. There’s also evidence to suggest that smaller businesses with growth aspirations are more likely to achieve those growth plans if they can make use of external finance. Therefore, getting it right with recruitment finance when starting up can give you a stronger chance of growing the business in the longer term.
Market Knowledge – do your homework
You wouldn’t start a recruitment business without having a good knowledge of the market sector (s) you’re entering. Then why would you choose a financial provider who is not a specialist in your industry? If you’re starting a recruitment business this year, it’s important to find a financial provider with specialist knowledge and experience of the recruitment market.
How will you manage your business?
It’s important to be clear on this from an early stage. Your financial choice will have a direct impact on how you manage your business, so it’s important to be aware of what each specialist provider can offer you.
To Factor or not to Factor
Some recruitment agencies choose factoring to fund their recruitment businesses. Factoring providers will purchase your unpaid invoices and advance most of the value of your invoices. The amount varies between company but may be up to 95%. However, if you are a temporary recruiter, you need to be sure that the level of advance you receive from the funder is going to be enough to cover the payment of your weekly temp/contractor wages. A recruitment business has to be able to guarantee payment of its workers every week and needs the cash flow to do so.
Whether you have 1 or 100 temps/contractors, Simplicity’s flexible funding solution pays your workers – guaranteed every week. We also have a funding solution for permanent placements. This means no more waiting 30+ days to get paid. Simplicity fund 100% advances on invoices within a few days.
How much debt will your funder allow with a single debtor? If a potential funder has a fixed concentration limit of 20% and you have a sales ledger of £100,000, then the lender will only consider £20,000 of funding with any single debtor. Therefore, if you have a single debtor with a value of £30,000, your finance provider will only consider £20,000 as eligible debt, leaving you with potential cash flow issues.
Also, consider your client base. If most of your business is made up of a few large clients with one of these accounting for 20% at any one time, then concentration limits can impose a real risk. If you’re just starting up a recruitment business, concentration limits may not seem an issue to worry about. However, they may well become as you develop your client base.
Factoring does not always provide debt protection as standard. Debt protection protects against a loss should one of your clients goes bust. It can and does happen. Ensure that your funding solution comes with debt protection for peace of mind and to reduce your risk level.
If you choose to go down the factoring route, then the factoring company will take responsibility for collecting payments from your sales ledger. Be mindful of interest charges on outstanding invoices and aged debt. Once your client’s debt reaches 90 days, you could be faced with re-factoring charges and the factoring company holding back that money. You, therefore, need to ensure that you have a robust credit control system in place that focuses on reducing debtors’ days and improving cash flow. Stay alert to who owes you money. Will you have access to a debtors’ report in real time? It can help ‘flag up’ repeat offenders – you can then decide if the debt is being properly chased or if you need to stop doing business with the client as it’s putting your business at risk.
Your funding cap is the amount that your business will be allowed to have outstanding at any one time with your provider. Once exceeded, a Factor can hold that money back from the amount available to your business, causing cash flow issues. As a result, you may find your growth being restricted.
Are you a payroll specialist? If the answer is no and you are working with clients on either a temporary or contractor solution, then you need to consider outsourcing your back-office. A Factor who says they provide ‘recruitment funding and back-office’ support, may not do all the work themselves. They ‘partner’ with another supplier for their back-office. You could end up having multiple suppliers managing the finance, payroll and credit control. It could get complicated when issues arise in terms of accountability.
Before signing any contract, be aware of everything you will be charged for. From credit checks to setting up clients and refactoring charges – it all adds up. These extra charges can eat into your cash flow and further restrict your growth plans.
Is there an alternative?
Simplicity have been providing recruitment finance and complete back-office solutions to recruitment start-up and growing agencies for over 16 years. We only work in the recruitment industry which means we understand the challenges you face. Whether you are looking for permanent or temporary and contractor solutions, we do it all. Our 100% finance solution is scalable to meet the demands of your business with no concentration or funding caps. What’s more, our full back-office support provides you with peace of mind that your workers will be paid on time every time. We love payroll, however, your workers are paid.
We’ll help reduce your risk and improve your cash flow through our credit control and due diligence service. Our debt protection comes as standard too. What’s more, Simplicity manages everything under one roof. So, if you’re starting a recruitment business, contact one of our recruitment specialists today or download our guide on how Simplicity can help get you started with our temporary or permanent recruitment agency funding solutions.
Please contact: https://www.simplicityinbusiness.co.uk/contact/