Invoice Finance or Invoice Factoring
If you’ve made the decision to set up and run your own recruitment business, particularly in the temporary market, you will inevitably eventually need to decide how best to finance your weekly payroll.
Below is our brief guide on the very different options available to a new recruitment business director.
Principal or No Principal?
When seeking funding support for your weekly payroll you must first establish what it is you are really looking for. There are broadly two options available in the market. These options are significantly different and will depend on your attitude to risk as to which you believe to suit your needs best. It is very important to understand these differences when choosing which facility to opt for as you would be ‘comparing apples with oranges’ without this understanding. We’ve briefly explained the key differences below.
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Option A – Typical invoice factoring
With this option, a funder typically assesses you and your business against a certain risk criterion and choose whether or not they should essentially lend you a facility to fund your payroll. If agreed, in most cases, a debenture or personal guarantee would be sought by the lender to guarantee the money they are essentially lending you and your business. If something went wrong with your business, this guarantee may be triggered, and the lender would look to reclaim its losses from you. Typically, traditional banks operate non-principal facilities because they do not have either the relevant recruitment specific industry expertise or the appetite to shoulder the potential risks or liabilities. Typically pricing is complex and there may be additional charges for things such as refactoring so be sure to fully understand what all of the costs are if you are choosing option A.
In this ‘non-principal’ arrangement, your business retains all of the risks from day one, therefore, the following examples/ scenarios will fall at the feet of your business:
- A client goes insolvent or doesn’t pay you.
- Falling foul of any recruitment industry-specific legislation
- Falling foul of any payroll compliance-related penalties
- All employment obligations
- All costs including insurance/ insurance claims
Option B – Invoice finance or back office funding services (Principal)
This option enables a recruitment business to trade genuinely risk-free from day one as any potential liability sits solely with the back-office funding company who in turn completely mitigate any of these risks. Such services not only offer the funding for the weekly payroll but also perform many of the crucial day to day back-office tasks that a recruitment business requires. Often these types of businesses have people within them that have little to no banking experience but do have extensive experience working within the recruitment space and may even have operated within a recruitment business themselves – hence the depth of industry-specific understanding. Usually, pricing is very straight forward and easy to understand compared to factoring. There are no ‘hidden charges’ and typically everything is charged via one simple weekly fee.
A true ‘Principal’ arrangement protects an agency against all potential liability relating to examples/ scenarios such as:
- Non-payment of invoices. The debt sits with the back-office funder
- Non-compliance with any recruitment industry-specific legislation
- Non-compliance of any payroll related services
- Any issue relating to the engagement/ employment of workers or contractors
- Insurance claims/ costs
What we offer
Recruitment Funding Solutions offer an ‘Option B’ invoice finance product whereby the agencies we engage with enjoy a risk-free service which also includes a full suite of back office functions to support the ongoing growth of their business.
To discuss this option for your new recruitment business, call us: