The íFí word confusion and getting the cash flow service you need

It is around 40 years now that invoice debt funding services have been in the UK in earnest. In the 1960s what I now define below as Factoring was about the only service offered. The market has developed out of all recognition since that time but having worked in recruitment both as a user and provider of invoice finance and provided outsourced services for BACS and now, working as the MD of a recruitment invoice finance and support company, I am very much aware of how the F word ìFactoringî is often misused and misunderstood in the recruitment industry. In essence what recruitment companies really want to buy when they say ìFactoringî is cash flow and service. The analogy - which sucks - is that they want to buy a ìVacuum Cleanerî but they ask for a ìHooverî.

Factoring has tended to become a generic word for raising cash flow from invoice debt funding and that can cause confusion because, in recruitment in particular, there many more ways of obtaining cash flow from invoice debt, than simply factoring.

The Factors and Discounters Associationís name provides a clue with the word ìdiscounterî although I like very much the phrase ìAsset Based Lendingî used by Lloyds because in fact, a debt on an invoice is really just another asset against which funds for cash flow can be advanced by a lender. Just as not all vacuum cleaners are Hoovers, so not all Invoice Finance is factoring.

Just as all invoice debt finance does not fall within the general definition of factoring so not all factors or ìfactoring offersî are the same either as I am sure factors will be pleased to tell you. Those that service the heavy engineering business sector will have a very different approach to invoice debt finance from those that service the recruitment sector, where ìinvoiced pre dispatch stock holdingsî simply do not form part of the debt risk and balance sheet assessments. However all invoice funders are Asset Based Lenders where the asset is invoice debt. I hope that the general term ìInvoice Financeî might replace Factoring in the recruitment industry not only so that buyers can seek out the right service deal for their business but also because, it uniquely, has so much more than just Factoring on offer. The recruitment industry is cash hungry and a good contract with temps paid weekly but clients taking up to 7 or 8 weeks to pay can be a cash flow killer. There is simple explanation below of the most common offerings in the recruitment industry, gradated by service level, that I hope might prove helpful to recruitment business using invoice finance to gain improved cash flow.

Invoice Discounting

The least cost and least service offering is called Invoice Discounting. This is generally a ìconfidentialî arrangement (i.e. there is nothing on your invoices to indicate that the invoice has been used as an asset against which you have raised funds.) I.D. is not generally available to new starts in recruitment industry because, as the discounter is remote from the invoice details; as well as PandL history and a satisfactory balance sheet; it would want to see strong evidence of a track record of good sales ledger management and credit control by its prospective client. Clearly new starts cannot provide such evidence. The borrowing limits are generally firmly fixed, so good cash flow forecasting is imperative and bad debt provision needs to be made or credit insurance purchased. Cash demands like VAT and PAYE returns must be carefully planned for so that you always have enough cash to pay temps.

Factoring

There are various levels of involvement and support but factoring normally adds two ìsignatureî elements of service to the Discounting offer. These are sales ledger management and credit control. The service costs a little more than Discounting but it can also remove the heavy administrative burden of credit control. Normally, your invoices bear an ìAssignment Stampî confirming that the debt has been assigned to a factor and because of this involvement and security, often higher levels of funding are allowed than would be obtainable from discounters. Because invoices in recruitment are supported by time sheets, factoring is quite often available to new start temp businesses in recruitment. The borrowing limits are generally firmly fixed, so good cash flow forecasting needs to be in place and bad debt provision needs to be made or credit insurance purchased and cash demands like VAT returns and PAYE payments carefully planned for so that you always have enough cash for the most time critical payment - temps wages.

Invoice Funding and Support Companies

Unique we believe for the requirements of the recruitment industry are the above Again there are various levels of involvement and support but generally they will add to the ìsignatureî sales ledger management and credit control of factors, their ìsignatureî of payroll for temps and invoice generation of your invoices. The best will provide a comprehensive service including at least a weekís grace in cash shortfalls to cover temp wage payments, (rather like a free emergency over draft so temps never suffer) bad debt protection, comprehensive weekly and year to date management reporting including holiday pay reporting and SMS reporting for mobile branch managers, all reporting and payments to HMRC for temps, year end returns, be on line to HMRC for the fast updates to tempsí tax status needed to service this fast moving industry, bespoke invoice and payslip printing with your logo, invoice and timesheet matching and despatching and reporting, VAT payment provisioning, legislation change alerts and often even more. Because of the intimate involvement with your invoicing and payment cycles and therefore reduced fraud risk for the funder, higher levels of funding can be made available and such services are specifically useful to new starts. With such service you normally do not need to plan for cash flow ìholesî resulting from bad debt or VAT returns or whether there will be enough cash to cover the temp payroll and PAYE tax payments to HMRC etc.

Pseudo Invoice Financers

Again unique we believe to the recruitment industry are the above. They present like the Invoice Funding and Support Companies above and provide many of the services associated with them. Unlike all of the categories above however, the invoice to the end user is not in your name and the sales to the end user are not yours. Their ìsignatureî is that you will be required to use their terms and conditions of business and the invoice to the client will be theirs, a portion of which will be paid to you. It could be argued that because the invoices to end user clients will not be yours but theirs; that such businesses are not really invoice finance companies at all but de facto employment businesses. Such services are very useful for new starts who wish to work as ìagentsî of the invoice financer rather than as principals of their own business. With such service you normally do not need to plan for cash flow ìholesî resulting from bad debt or VAT returns or whether there will be enough cash to cover the temp payroll and PAYE tax payments to HMRC etc. However, there is evidence that the VAT man is currently taking particular interest in such pseudo invoice financers and you might wish to assure yourself that you have no VAT liability for their invoices - and that HMRC is happy with their company structure - before committing.

The fast developing environment of the recruitment industry means that many invoice finance variations have evolved and as well as the above, we have seen Agency factoring, Bulk factoring, Disclosed Invoice discounting, Merchant financing, Confidential factoring and Asset Based Lending all mentioned as titles and schemes. Many like the unsuccessful Darwinian evolutions will doubtless be discontinued in time. So perhaps it is no surprise that potential buyers of cash flow and services use the F word all too often. My hope however, is that this small contribution to understanding some of the different offerings might help potential buyers to seek out the kind of Invoice Finance (cash flow service) they need rather than simply asking for - and consequently be offered - a ìfactoringî service which could be, but might not be, the best cash flow service solution for their business.

David Thornhill - Director - Cash Simply.