By Simon Palmer, Smart Funding Solutions
Every agency that places temporary workers runs into the same problem sooner or later. Your temps are paid every week. Your clients pay on 30, 45 or 60 day terms. The more contractors you place, the bigger that gap gets, and a good month on the sales side can leave you short of cash on a Friday. Growth, in other words, eats cash.
The good news is that this is one of the best understood problems in business finance, and there are several ways to fund it. The bad news is that the agreements differ far more than the headline rates suggest. Here is a practical guide to the options, what they really cost and what to look for before you commit.
“A fixed loan of £50,000 would cover today’s gap but not next quarter’s.”
— Simon Palmer, Director at Smart Funding Solutions
The main funding options
Invoice factoring. You raise an invoice, the funder advances most of its value, usually 80% to 90%, within a day or so, and pays you the balance less its charges when your client settles. The funder runs your credit control and chases payment, so your clients will know a funder is involved. Factoring suits younger agencies that want the collections handled for them.
Invoice discounting. This works in the same way, but you keep running your own sales ledger and the arrangement is usually confidential. Funders generally want a larger turnover, a clean ledger and a track record before they offer it, so many agencies start on factoring and move across later.
Selective or single invoice finance. Rather than funding your whole ledger, you choose individual invoices to fund as and when you need to. There is usually no long tie in, which makes it a useful way to test the water or to fund one large client.
Recruitment specialist funding. Some funders work only with agencies and labour suppliers. As well as the funding they may handle payroll, timesheets and back office work, and some advance up to the full value of the invoice. They can also fund contractors placed overseas or invoices raised in other currencies.
Business loans and revolving credit. An unsecured loan or revolving facility can bridge a one off gap, but repayments are fixed and do not grow with your book. For an agency adding contractors every month, funding that rises with your invoices is usually the better fit.
What it really costs
Invoice finance is normally priced in two parts, and agency owners often compare only one of them.
The service fee is a percentage of the invoices you put through the facility. It covers running the facility and, on factoring, the credit control.
The discount charge is interest on the money you actually draw, usually a margin above the Bank of England base rate, charged daily on your balance.
Then come the charges that never appear on the headline. Look for minimum monthly or annual fees, charges for same day payments, audit and survey fees, fees for invoices the funder will not fund, and charges for leaving early. On a small or seasonal ledger, a minimum fee can make a cheap looking facility expensive.
A worked example
Take an agency with 25 temps on site, each billed at £600 a week, so £15,000 of invoices a week. The temps are paid weekly but the client pays at 30 days, so by the time the first payment lands the agency has paid out roughly four weeks of wages, around £50,000 once you include employer costs, before a penny has come back.
With an 85% advance, each £15,000 weekly invoice releases about £12,750 within a day or two. That covers the Friday payroll from the client's own invoices, and the remaining 15%, less charges, follows when the client pays. As the agency places more contractors, the funding grows automatically with the invoices. A fixed loan of £50,000 would cover today's gap but not next quarter's.
Now take a second agency with one large client on 60 day terms that makes up most of its ledger. Many funders cap how much of the facility can sit with one client, often called a concentration limit. If that limit is 40%, the agency may only be able to draw against part of its biggest invoices, and the facility is far smaller than it looked on paper. Selective invoice finance, or a funder comfortable with that client, can be the better answer here.
What to check before you sign
The advance rate. A higher advance means more cash from the same invoices. Ask whether it applies to every client or only some.
Concentration limits. Find out how much of the facility can sit with your largest client, and what happens when you win a big new account.
Notice periods and tie in. Many agreements run for 12 months or more with a notice period on top. Check what it costs to leave and whether you can reduce the facility as you grow.
Minimum fees. Make sure you will put enough through the facility to avoid paying for capacity you never use.
Disclosure. Decide whether you are happy for clients to see the funder's details on your invoices. If not, you need a confidential facility.
Recourse. On most facilities, if a client does not pay, the invoice comes back to you. Bad debt protection is sometimes available, at a cost.
Personal guarantees. Most funders ask directors for a guarantee or indemnity. Know exactly what you are signing and for how much.
How long it takes to set up. Funders need to review your ledger and contracts first. Start the conversation before the cash gap arrives, not on a Thursday afternoon.
The bottom line
For most growing agencies, the right funding is the one that grows with your book, gets your temps paid on time and costs what you expected it to. Compare the total cost on your real invoice volumes rather than the headline rate, read the small print on notice periods and minimum fees, and get quotes from more than one funder before you commit. A broker who works across the whole market can run that comparison for you.
About the author
Simon Palmer is the director of Smart Funding Solutions, a whole of market commercial finance broker based in Chester that helps businesses compare lenders for invoice finance, business loans and asset finance. Find out more about invoice finance for growing businesses at Smart Funding Solutions.
