Are you getting what you need from your current invoice factoring company?
The importance of choosing the correct finance provider (also known as an invoice factor) who can provide you with the best opportunities to maximise your growth is immense. If you find yourself having to worry about your financial provider and their ability to help you fulfil your potential, then it may be time to consider a switch! Getting it right can give you back your invaluable time and save you the headache of admin, meaning you can spend it on the more important matters like growing your agency.
Finding the best fit
An essential decision for any recruitment agency looking to grow is the careful selection of their recruitment finance partner. Sometimes established agencies and new start-ups can fall into the hands of finance providers that may feel like the right ‘fit’ which can lead to some nasty ‘surprises’ down the line. This can come in the form of deals that end up costing you more than initially expected, or through penalties for over-trading or concentration levels or other restrictive T&C’s.
A great invoice factoring deal should provide you with the vital bridge in cash flow between paying your contractors and other key operational costs, and waiting for client invoices to be settled, which gives you the financial freedom to build your future on your own terms. Taking the time to thoroughly research the market and find the right deal is crucial as it can save you time, money, and energy in the long run, allowing you to focus on what you do best and maximise your growth.
Change can often seem difficult and time consuming so partnering with someone who can offer you a thorough audit and support you with your client communication's is imperative. Often a change can be the best decision you ever make, depending on who you chose to partner with.
You may be in a position where you’re actively weighing your options, or you may be in a situation where your current deal is causing issues; regardless there are a few aspects you need to take into consideration to make sure you are getting the best possible deal.
To help ensure you make educated decisions by considering all relevant factors, we’ve complied the following information that details the reasons for change, and the pros and cons of different funding routes.
So, have you been contemplating changing your finance provider?
Unhappiness with your current financial provider can be caused by various underlying issues. Based on over 6 years of experience here at 3R, the following is a list of some of the common reasons people consider change. If any of these concerns sound familiar, then it may be time to re-examine your options:
The ability to quickly negotiate contracts and get candidates working is key to any successful recruitment agency. To ensure all deals are securely confirmed, contracts need to be negotiated with proper credit checks in place. In this regard, any delays in the credit check turnaround can becomes a major problem.
Some finance solutions include rules around overtrading that can result in agencies receiving financial penalties. A credit limit will be determined when a new client is signed-up and a level of credit set. Over time, however, this level can end up being exceeded, which sees the agency hit with a penalty charge and a delay or stop in fees being paid to the recruiter.
Terms and conditions can feel never-ending and unsettling. Factoring agreements can include rafts of rigid and inflexible terms and conditions, especially when dealing with banks and other lenders. For example, around concentration levels and having all your eggs in one 'client' basket. When these terms are broken, finance may abruptly stop, and payments will be withheld until a resolution is made. Disruptions to daily activity may occur when the rules are misunderstood or if unexpected events arise.
Another frequent concern amongst established agencies and new start-ups is regarding the heavy-handed approach their recruitment financial service provider has with their credit control process. Generally, this is by going in too strong or harassing clients without keeping you and your agency informed. These factors can harm the client experience and their relationship with the agency, especially if the provider contacts individuals outside of those agreed.
The cheapest forms of finance often come with the greatest amount of administration. A bank or lender may allow you to draw down up to 90% of the value of an invoice, but you will then need to manage all administration, including carrying out payroll, invoicing, credit control and your business accounts – while covering the remaining 10%. This can make reporting tricky, as it can be difficult to tell what money you have actually made.
It’s not all negative! Sometimes change is needed for more positive reasons. Both established agencies and new start-ups can experience changing conditions, such as substantial growth, which can mean they require a new finance deal or renegotiation of the current one. Growth can give you leverage to be able to secure a better deal for the future of your agency.
Types of Finance Deals available to recruitment firms
So, you’re thinking of change…what happens next? What are your options?
Your initial priority should be to carefully review the terms of your current agreement for a notice period and payment clauses.
Traditional methods of cash flow management for recruitment firms have relied on banks and other institutional lenders, however, “all-in-one” back office solutions are a rapidly growing alternative with growing prevalence in the market. Cultivating a pragmatic experience, such solutions allow you to combine invoice factoring with all the associated back office administration in a one practical location.
But what can these two options offer? And how do they compare?
Banks and Lenders
How does it work?
Typically, banks and other third-party finance providers pay up to 90 per cent of the value of a customer’s invoice, minus an agreed fee. Within 24 hours of an invoice being received, the money is usually made available to you.
As it is a financial institution providing finance, such deals naturally come with multiple (and often inflexible) terms and conditions attached. This may include drawdown and trading limits, and penalties for overtrading and breaching credit limits. Therefore, it’s important to understand what you’re getting into and what the true cost of the finance deal will be.
Other things to consider are set up fees, termination fees, accountancy and legal fees, interest rates, length of contract and how the individual financier’s credit check process works.
All-in-one back office solution
How does it work?:
An all-in-one solution provides finance as part of a comprehensive back office package, so it not only frees up cash flow but covers everything from credit checks, timesheet management and paying contractors, through to invoicing and credit control.
A provider will begin by looking at your ledger to assess and verify the debt. They will then take on the debt, settling the balance on any existing finance deal. There is usually no cost or set up fee for switching and the process is designed to cause minimal disruption, with all administration taken care of (including contacting existing customers) as part of the move.
In the same way as a bank or lender would do, the provider then charges a percentage of the value of each invoice as an agreed fee. In the case of 3R, we do this based on the NET fee (NFI), but other supplies may charge on VAT too.
The percentage rate will vary dependant on various circumstances, including the recruiters’ sector and type of business. Different fees will also be applicable for perm and contract business.
Ultimately, your focus is on recruitment and maximising the growth of your recruitment business. If your current invoice factoring service is causing you grievance and obstructing your focus, then be assured better options are out there for you and switching is easier than you think. Make sure to be thorough in your research and pick a deal that will make your life easier!
The secret lies in asking the right questions and making an informed decision.
Here at 3R Finance, our focus is on providing an all-in-one back office solution that takes away the headache of the administrative process related to invoice factoring, and allows you the time to take charge of your recruitment firm’s future.
For starters, make sure you download our handy free checklist: 'What to ask when choosing a finance deal' and ensure you’ve got everything covered.