Invoice finance is a financial service that helps businesses release money tied up in unpaid invoices.
This type of funding is an attractive proposition for recruitment start-ups and small agencies as it provides a steady cash flow and helps them to plan ahead and drive growth in their business.
How does invoice finance work?
A business sells its accounts receivable (invoices) to a finance provider, who in turn makes a prompt payment to the value, or percentage of the value of the invoice(s).
Widely known as invoice factoring, this service appeals to small businesses in particular as it provides cash quickly – avoiding the problem of them having to wait (and chase!) for clients to settle invoices.
Invoice finance tends to be a cheaper, quicker and more flexible funding option than more traditional borrowing via bank loans and overdraft facilities, or when compared to the complex route of finding an investor for your business.
What are the benefits of invoice financing over traditional borrowing?
With invoice financing, businesses are not borrowing money beyond their means. The amount paid by the financial provider is based on the value of their invoices. In other words, based on work secured rather than projected.
Applying for invoice funding usually follows a straightforward step-by-step process.
It is normal practice for the finance provider to run credit checks on an agency’s clients. Once approved and the terms of the funding agreed, the invoice finance provider works with the business owner to take on the sales ledge), implement any new back office procedures and start releasing funds – usually within 48 hours of invoices being issued to clients.
An invoice-factoring provider should also take responsibility for credit control, so an agency doesn’t lose time and money chasing payments.
By reducing the risk of late invoice payments, business owners have easier access to regular funds to cover their own fixed costs, and the confidence to reinvest money back into the business. Perhaps sooner than they would otherwise have been able to.
Does invoice finance work for recruitment businesses?
A steady cash flow is crucial for recruitment agencies. Paying contractors on a regular basis when waiting for clients to settle outstanding invoices can prove stressful and time consuming.
Struggling to balance the books can prevent an agency from pitching for more business and winning larger contracts – which hampers growth.
A specialist recruitment finance provider should understand the nuances of running an agency. As well as invoice funding, their services may include back office support to help manage contracts, timesheets, invoicing and payment processes.
While larger established agencies are likely to have their own back office system already in place, small agencies often require this additional level of support to reduce the burden of admin, giving them the freedom to focus time and energies on building the business.
Key considerations when choosing an invoice finance provider
Before selecting an invoice finance provider, it is worthwhile considering the following factors:
- The type of invoice finance on offer.
For example, invoice discounting is an alternative to invoice factoring, which provides the finance based on the value of invoices, but responsibility for chasing payments stays with the agency.
- The additional services and support.
What level of support does the finance provider offer? An online back office system will help a small business manage timesheets, contracts and invoicing; while dedicated account managers and personable customer service is important when a business has queries and ad hoc requests.
- The fees and finance limits.
Fees can vary according to the finance provider and the volume and value of the business. A provider should clearly communicate all the fees that apply to their funding, and limits to the amount of funding available.
- Processing invoices and payments.
A specialist recruitment invoice-finance provider should be able to handle permanent invoices if required. They should also be able to factor overseas contract invoices, so your business can make the most of any global opportunities that arise.
- Flexible finance.
Check that the finance provider does not insist on long-term commitment and does not tie the agency into a fixed term contract if it is not required. Invoice finance should be flexible. A provider should allow an agency the freedom to choose which of their invoices they factor – giving them the confidence to take on more clients and larger contracts, knowing that advanced funding is available should they wish to use it.