By Richard Prime, CEO of Sonovate
Contract employment is one of the fastest growing areas in recruitment. It’s now worth £26 billion in just the UK – and unsurprisingly, it’s attracting a lot of recruitment businesses who want a piece of the contract pie.
But it’s not just good for the UK economy; it’s good for recruiters. By taking the contract recruitment route, businesses have improved financial stability, profitability, and can more effectively service their clients’ needs. All well and good: but how can you fund contract recruitment when clients pay you monthly and you need to pay your contractors weekly?
In the past, many recruitment businesses went to the banks to plug this gap and secure the finance they need. But this presents more problems than it really solves. These traditional lenders issue lengthy contracts which contain reams and reams of small print – and all too often it is incredibly difficult to see the long-term effects of these terms and conditions on business.
The simple commercial fact is that banks aren’t designed to fund the contract books of recruitment agencies – they weren’t set up with that intention, and so recruiters using them are getting an impersonal, off-the-shelf service. These banks don’t have industry knowledge, nor do they understand how our lending requirements differ from other industries. To take an example, many funding contracts from banks include terms that restrict the level of business an agency can do with any one client. This is known as concentration, and for banks it makes sense: for financiers a high level of concentration means a greater risk associated with the money lent to a business. For an agency with a more concentrated contractor-client ratio, this ultimately means that less money will be advanced by the bank, and the agency will have less opportunity to grow.
Unfortunately, this is just one of the inflexible procedures put in place by traditional lenders that can catch a recruitment agency out. Another term commonly found in the small print is that many lenders will hold back up to 40 per cent of an agency’s profits. For a start-up or small recruitment business, this can spell disaster – it places enormous restrictions on cashflow and a business’s ability to scale. Similar fees in place are late-payment fees, which mean that an agency is held responsible for financially backing up a client who pays late. Ancillary fees for any services which are considered out of the contract terms, re-factoring charges incurred by late invoices, and discount charges as interest on cash advances.
At the point of payment these fees might seem like relatively little, but think of what that money could do for business when it’s all added up. It could mean more office space, better computers or software, or even a few new hires to really get your business moving onwards and upwards. It’s the agencies that really suffer by ignoring the warning signs that are hidden in the small print.
Couple these inflexible, business-damaging procedures with the strict all-turnover agreement put in place by a lot of traditional lenders, and the problems are compounded. These agreements mean that all the finance you need to run contractors has to come from the same lender, or you get nothing. And it really is all or nothing: if you want to finance one client with invoice factoring from a different bank at improved rates, you can’t. This gives lenders an obvious advantage, locking their business in over the whole term of a contract, which is usually a minimum of 12 months.
All this means that it is crucial for recruiters to read the small print of their lending contracts. Often what you think you’re signing up to is very different to what you’re actually committing yourself to. When it comes to start-up recruitment businesses, these terms can be incredibly damaging and really prohibit growth. After all, where will your new business be in a year’s time? A lot can change in a year – your business might well require a very different finance package to the one you signed up for. Dig deeper than the marketing speak, look for flexibility and watch out for those hidden charges when you’re hunting for the best finance for your recruitment agency. Contract recruitment is hugely lucrative for the industry and agencies should not be punished for growing their contractor book, so don’t be!
