There are many finance options available to small businesses, it can be a little over-whelming and on the face of it, can seem complicated. Recruitment agencies tend to have two main options for funding the temp element of a business: invoice factoring and invoice discounting.
With invoice factoring the provider such as Quba Solutions takes control of managing the sales ledger, credit control and ensuring customers settle their invoices.
With invoice discounting, the recruitment agency retains control of its own sales ledger and chases payment in the usual way.
In our personal business experience invoice discounting is traditionally used for much larger agencies that have a turnover in excess of £7 million+. You may ask yourself why and the underlying reason is because those agencies are more likely to want to invest in a team of people to carry out the back-office functions that are needed to collect and process the debt and make payments to the operatives.
Invoice discounting is also beneficial as the end client does not know your funding arrangements as the payments are made directly into your account and the credit control is managed directly by you the agency. What is the downside? You will have regular audits by the bank, receive typically 75 – 90% of the invoice value so this can cause cashflow difficulties. You will also need to be an expert in payroll and credit control, require payroll software and have additional debt protection. Debt protection can be an expensive addition to the business as factoring companies will receive huge discounts due to the size of their overall debtor book. You will also hear of Concentration limits; Invoice discounting will require you to have a good spread of clients, trading with one large client is something that you cannot do as they perceive this to increase “risk”. If your client accounts for as much as 20% of your total monthly billings then concentration limits in place restrict you from gaining access to those funds, your business is going to run into some major cashflow problems.
Invoice discounting sounds very favourable when comparing this to invoice factoring, the problem is they are very hard to compare. Invoice discounting basically gives you the cashflow advantage and not much else, you will also need to make sure you thoroughly look through and add up all the additional costs. You will pay interest on the amount advanced to you and there will be an additional amount to cover the finance provider’s administration costs, often referred to as a service fee.
Yes, but the functionality of the two products is different so they require a different set up. Invoice factoring partners such as Quba Solutions provide the back office and an online dashboard, allow you to focus on the business development side. If you have set up with an invoice discounter you will likely have invested in payroll products and a credit control function. These will no longer be required if moving to factoring partner, so be sure that those agreements are easy to remove yourself from, or are a short contract length. The costs of the two products will also differ but take into account the extra costs required if you you choose to use a discounting facility as you’ll be providing all the back office yourself.