Insight from industry expert Paul Tonks, on the importance of invoice financing.

The UK business landscape is changing significantly. The continuous growth of finance solutions available to businesses means companies are extending payment terms in order to remain competitive, this as a result puts pressure on cash flow and financing future growth is on the rise.  

We spoke with Paul Tonks, the Founder & Finance Director of Quba Solutions about the importance of invoice financing for the recruitment industry. Paul Tonks founded Quba alongside partners Rik and Ash, and has spent 15 years as a Finance Director for one of the world's 2nd largest recruitment organisations. His experience in looking after finance, credit control and a vast selection of back-office functionality fits hand-in-hand with our core services at Quba Solutions.

Why do recruitment businesses need to consider invoice financing?

A recruitment business operates in two basic ways – they can supply permanent candidates for placement, these give a one-off fee which essentially costs the agency nothing apart from time and skill.

Temporary placement is very different, your worker will expect to be paid every week and your client will expect not to pay for some time – typical terms will be 30 days, but many clients will take longer to pay than that. This means an agency will need to have access to a flexible amount of working capital in order to fund this.

There are different finance options out in the marketplace, however, invoice finance is one of the most popular solutions for recruitment businesses. The main reason being is that it provides a percentage of every bill, allowing temporary workers to be paid, however, the invoices are normally only funded at a set percentage level. There are normally rules around the funding too – 90-day debt is excluded, credit limits may not be sufficient, and concentration levels may limit funding.

All these turn what sounded simple at the outset into something which can give an agency a real headache if they do not have sufficient availability to fund the workers that week or pay their VAT bill.

What difference does the construction industry make to finance?

Invoice factoring works on the basis a £1,000 invoice is worth £1,000 so the funder knows how to value the lending they make available. This can go wrong if you work in the construction sector as the agency is likely to get caught by CIS and if you do not have gross status you will only get paid 70-80% of the invoice value. This is normally a breach of the funder’s contract so will lead to suspension of the facility and the need to move elsewhere if possible. If this issue is not dealt with quickly most agencies caught by it will run out of cash and go bust. Not ideal.

Is invoice financing costly?

The cost of invoice financing can be costly depending on the company offering the service, however it can also be one of the most efficient investments a business makes. It is always a good idea to consider several suppliers and ensure you fully understand the following:

  • Discount charges (interest) offered

  • Management and/or service feeds

  • Length of invoicing period

  • Additional costs - such as debt protection, back-office functionality, payroll and billing management

  • Notice period for ending an agreed service.

Am I best to employ my own back office?

This is often the initial thought for an agency looking to reduce costs, but until the agency reaches a considerable turnover (we would normally suggest £10m per annum), the reality is the cost of your own back office is pretty high compared to outsourcing to a provider.

For a small agency, say around £2m turnover, it will involve: payroll for 50 temps, creating payslips, submitting returns, creating invoices, sending out documents, calling clients, agreeing on payment plans, banking, setting up accounting systems, reporting to your funder and so on. This will often require a couple of accounts staff, possibly part-time, plus all the software, paper, stamps, and not least space to be able to perform their tasks.

Employing your own team to complete back office management can often expose your business to significant risks – what happens if the temps are not paid? Or your biggest client doesn’t pay on time?

Generally, running your own back office can be costly and inefficient for your daily business practice, be sure to complete your research!

If you have are looking to source a dedicated, efficient and knowledgeable supplier to help your business in invoice financing, then why not contact us for more information? We can provide the support you need to see your recruitment agency thrive.