How much time and energy are you wasting with your finance provider?
It may be vital for your business, but your finance provider shouldn’t be causing you a headache. So, if you’re wasting precious time worrying about them, then it’s probably time to review your options! The good news is, get it right and it will make your life a whole lot easier.
Best fit finance
Choosing a finance partner is one of the most important decisions any recruitment agency needs to make. It provides the vital bridge in cash flow needed between paying contractors and other key operational costs and waiting for client invoices to be settled.
Finding the right deal can save you time, support your business to grow and make your life a whole lot easier. However, securing a deal that’s not a great ‘fit’, or pushing ahead without knowing all the facts, can lead to some nasty surprises down the line – such as finding out your deal actually costs you more than you expected, or being hit with penalties for overtrading and breaking other terms and conditions.
The good news is you have options and it may not be as difficult, nor as time-consuming, to change to a new provider as you might expect. Depending on who you move your business to, it could also end up being the best decision you ever make.
Whether you are actively assessing your options, or you’re experiencing issues with your current finance deal and think it may be time for a change, there are certain things you need to take into consideration.
Here, we’ve taken a closer look at what you need to think about, from reasons to change, to the pros and cons of different funding routes and the questions you need to ask to ensure you hit on the best option for you.
There are many reasons why you may be unhappy with your current finance provider. Here are some of the most common reasons we hear at 3R. If any of these issues sound familiar, then it’s probably time to consider your options:
The top criticism we hear from recruiters who are unhappy with their current finance deal is that they receive poor customer service. They tell us providers can be difficult to reach, slow to react and unhelpful when there is a problem. They also end up speaking to a different person every time they call and keep having to repeat themselves, which wastes even more time.
Something that is very important for any recruitment agency is the ability to work fast to negotiate a contract and get candidates working. Delays on the turnaround of credit checks can be a big problem. As contracts need to be negotiated based on the credit rating to ensure the best possible deal is achieved, it’s vital you have the correct information quickly.
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.
Endless rules can trip many agencies up. Finance agreements, especially those from banks and other lenders, tend to involve a raft of terms and conditions, which are often rigid and inflexible. For example, around concentration levels and having all your eggs in one 'client' basket. Break those terms and the finance may be stopped until the issue is resolved. If the rules are not fully understood or something unexpected happens, it can be very disruptive to day-to-day operations.
Another issue we often hear about is finance providers, who are in control of chasing outstanding debt, can be heavy-handed in their credit control processes. When money is owed it is sometimes felt they go in too strong and harass clients, while also failing to keep the agency informed. They may approach individuals outside of those specified as the agreed contacts and potentially damage the client experience and relationship.
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.
One positive reason an agency may be considering changing its finance deal – or at the very least renegotiating it - is that there has been a major change in situation. For example, the agency has grown substantially since securing its existing deal, meaning it now has more leverage and may be able to secure a better one that is also going to be a better fit for where the agency is headed.
So, you think you want to change...so what now? What are your options?
The first thing you need to check is the terms of your current agreement and what clauses it contains.
While traditionally recruitment businesses had to rely on their bank, or other institutional lenders, to manage their cash flow, the use of ‘all-in-one’ back office solutions is an increasingly popular alternative. Rather than simply helping with invoice factoring, such solutions provide all the back office administration associated with it too.
But how do the two options work? And how do they compare?
How does it work?:
The bank or another third-party finance provider (also known as an invoice factor) will typically pay up to 90 per cent of the value of a customer’s invoice, minus an agreed fee. This money is usually made available within 24 hours of an invoice being received.
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.
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.
If you’re unhappy with your current finance partner, be assured you always have options and it may be easier to switch than you think. Do your research and choose a deal that’s going to make your life easier, while helping you maximise your time to focus on business growth - not cause you headaches!
The secret lies in asking the right questions and making an informed decision.
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.