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Invoice Discounting for Recruitment Companies
For recruitment companies, efficient cash flow is vital. When you are responsible for the livelihood and salaries for many hard-working individuals, segmenting and prioritising payment obligations is impossible - each contractor deserves their payment, and every single one of them is relying on getting their dues on time to manage their lives.
When a potential delay arises between an invoice being issued and its payment, threatening the delicate balance that makes on-time payments possible, a solution is essential. Invoice discounting offers that support.
What is Invoice Discounting?
One of two core invoice finance products, invoice discounting provides a method for leveraging the unpaid invoices that form accounts receivable, borrowing against trusted future payments to secure immediate funding that meets essential needs.
For recruitment companies, invoice discounting is used to provide a secondary line of support that offers the cash flow stability required to maintain smooth operations.
Invoice discounting is available in two distinct structures - as a one-off lump sum loan tied to one or more individual invoices, or as a revolving credit facility (RCF) that provides consistent, ongoing financial support for the business.
While many businesses in different sectors make efficient use of invoice discounting loans, for the majority of recruitment organisations, it’s as a revolving credit facility structure that invoice discounting provides the essential peace of mind and assurance that maintains operational flow.
Why Use Invoice Discounting?
Invoice discounting forms a bridge between the need for capital today and the distant payment of tomorrow. For recruitment companies, payment terms with significant clients may be as much as 60-day or 90-day net terms, representing a delay of up to four months between the time an invoice is issued and cleared funds becoming available.
An invoice discounting loan or facility advances a substantial portion of that invoice value immediately under the agreement that it will be repaid once the invoice is settled according to its set terms.
Without invoice discounting, a 90-day net invoice issued on 10th January may not be paid until 30th April. But with invoice discounting, that money is potentially available within hours.
Contractor salaries can be met without delay and without putting strain on your business’s capital.
Invoice Discounting Revolving Credit Facilities
A revolving credit facility is a supportive line of credit that can be utilised as needed, just like a credit card. Businesses can draw down from the revolving credit facility as needed, unlocking the money tied up by unpaid invoices.
Funds are then repaid to the facility once client invoices are cleared. An invoice discounting RCF scales with your business, increasing its credit limit as your accounts receivable grows, and reducing it as invoices are paid.
An RCF has two essential costs:
- Service fee - This is a fee that is charged irrespective of the level of use. The service fee is typically set to between 0.2% and 1% of business turnover and charged to the account monthly.
- Discounting fee - Similar to an interest rate, the discounting fee is charged monthly based on the credit drawn.
Revolving Credit Facility in practice
The following illustration explores the use of a revolving credit facility in stages.
Stage One - Facility Initiated
The facility is opened with a collection of invoices totalling £120,000. The facility LTV rate is set to 85%, providing an initial credit limit of £102,000 (85% of £120,000). Service fee is £1,500 p.a.; discounting fee is 6.5%.
- £0 drawn on £102,000 limit
Stage Two - Early Use
Contractor obligations require immediate drawing of £58,500.
- £58,500 drawn on £102,000 limit
Stage Three - Fees Applied
At the end of the first month, fees are added to the facility.
- Service fee: £125
- Discounting fee: £317 (6.5% annual rate calculated monthly against the current balance of £58,500)
- £58,942 drawn on £102,000 limit
Stage Four - Invoices Paid
Several client invoices are paid, resulting in a drop in the drawn amount and reducing the overall limit accordingly.
- Invoices paid: £40,000
- Credit limit reduced by: £34,000 (85% of £40,000)
- Total drawn reduced by: £40,000
- £18,942 drawn on £68,000 limit
Stage Five - New Invoices Issued
New invoices to clients are issued, raising the credit limit by 85% of the combined invoice values.
- Invoices issued: £50,000
- Credit limit increased by: £42,500 (85% of £50,000)
- £18,942 drawn on £110,500 limit
Stage Six - Ongoing Use
Another month of fees is applied, funds are drawn, some invoices are paid, and new invoices are issued.
- Service fee: £125
- Discounting fee: £103 (6.5% annual rate calculated monthly against the current balance of £18,942)
- Funds drawn: £38,300
- Invoices paid: £23,000
- Credit limit reduced by: £19,550 (85% of £23,000)
- Total drawn reduced by: £23,000
- Invoices issued: £17,400
- Credit limit increased by: £14,790 (85% of £17,400)
- £34,470 drawn on £105,740 limit
By obtaining an invoice discounting RCF, recruitment companies can benefit from a strong supporting line of funding that allows for consistent capital liquidity at a competitive rate.
The backup exists to help ensure contractor salary payments can be made without putting pressure on day-to-day business cash flow or having to negotiate shorter payment terms with clients.
Invoice Discounting vs. Invoice Factoring
Invoice discounting RCFs represent one option in the wider umbrella of invoice finance, with invoice factoring an alternative option. Where invoice discounting is set up as funding secured through accounts receivable, invoice factoring passes the invoices directly to a third-party factoring company (or factor), which then takes on responsibility for the debt, receiving payment directly from the client.
There are pros and cons to each system.
Transparency
The greatest tangible difference between discounting and factoring lies with transparency. A discounted invoice is a private transaction, like any standard business loan, and your clients are unaware of your arrangement.
Factoring, however, is transparent, and the factor will communicate directly with the client to secure payment. While this improves administration for you, it can sometimes be perceived negatively by the client.
Businesses unused to factoring may become confused and misinterpret the system with debt collection. For some recruitment firms dealing with younger and smaller businesses, factoring presents a negative image that can impact relationships.
Credit Control
Invoice discounting relies on your credit control systems to secure final payment from your client. With factoring, that responsibility is passed in part to the factor, who will have an established credit control protocol in place. This can aid when clients are higher risk, improving the likelihood of timely invoice payments.
However, factoring is not a replacement for bad debt collection. Ultimately, the onus to pay the debt remains with you, and if the factor is unable to secure settlement, you must meet the obligation, including involving debt management services if necessary.
Assessment Criteria
Invoice discounting is mainly assessed on your business creditworthiness. For newer recruitment businesses or those with weaker credit histories, this can lead to fewer successful applications.
While factoring also relies on your creditworthiness, there is also a consideration regarding the credit status of your clients. Additionally, the factor’s own credit control experience somewhat mitigates risk.
Many applicants find that invoice factoring is slightly easier to obtain approval for than similar levels of invoice discounting.
Invoice Discounting or Factoring?
Determining whether discounting or factoring is better for your business requires an assessment of these core differences, as well as an understanding of your funding needs.
Discuss your specific circumstances with your Clifton Private Finance adviser or learn more about invoice factoring in our knowledge base.
Alternatives to Invoice Discounting for Recruitment Companies
B2B-based recruitment companies with a spread of clients will often find that invoice discounting RCFs provide the ideal structure to support payroll obligations, expansion opportunities, tax liabilities, and other operational expenses.
However, while invoice discounting provides competitive rates and flexibility, there are other options available that have specific benefits invoice discounting may not offer.
At Clifton Private Finance, we explore your funding needs in a holistic fashion, building a full picture of your finance to match the right funding solution to your circumstances.
Other alternatives to invoice discounting that may be beneficial include:
Unsecured Loans
An unsecured loan can be obtained swiftly and relatively easily, assessed mainly on your business credit history. Its regular monthly repayment structure may also be advantageous to some companies, offering a clear term and defined interest rate from the outset.
However, unsecured loans are likely to be more expensive than equivalent invoice discounting, with higher rates that accumulate interest over a far longer term. Calculating and comparing the true cost of both an invoice discounting option and an unsecured loan is important when evaluating the advantages and disadvantages.
Unsecured loans may also:
- Place an additional strain on cash flow with a set monthly repayment obligation.
- Require a personal director’s guarantee, which may put your home and personal finances at risk.
- Have a greater impact on future debt finance applications, increasing debt service and affordability for a longer term.
Secured Loans
Secured, asset-based loans can offer extremely competitive rates and substantial loan-to-value ratios, offering larger sums and low monthly repayments. Recruitment businesses with property equity may benefit from exploring the competitive rates possible through second-charge mortgages and other secured facilities.
Many recruitment companies are light on tangible assets, however, and in those circumstances, leveraging accounts receivable through invoice discounting is typically the strongest alternative.
Overdrafts
A bank overdraft facility can offer similar benefits to an invoice discounting RCF, providing a secondary line of credit that can be used and repaid flexibly.
But unlike a dedicated and specialised invoice discounting RCF, bank overdrafts are unsecured finance, resulting in lower overdraft limits and higher interest rates than equivalent invoice discounting service and discounting fees.
For recruitment firms looking to meet an immediate need, obtaining a medium-sized overdraft facility from your bank may offer an immediate solution, while long-term funding may be better suited to a specialised facility.
Payroll Finance
Some specialist lenders may offer payroll finance to recruitment companies. This is dedicated funding that is specifically targeted to meet your payroll requirements, with the lender paying that obligation directly. Payroll finance is a specialised form of invoice finance that, like invoice discounting, leverages your unpaid invoices as collateral.
While payroll finance may offer some administrative advantages to wider invoice discounting, it is more limited and less flexible than a full discounting RCF. In most cases, wider invoice discounting is more suitable.
Invoice Discounting for Recruitment Companies with Clifton Private Finance
Clifton Private Finance is a specialist whole-of-market business finance broker with a dedicated team of experts working with clients in your sector to provide tailored funding to meet your needs.
Our business team understands the exact nature of recruitment firm capital flow and will develop a customised finance solution that best meets your individual needs. As recruitment companies commonly operate with minimal tangible assets, invoice discounting presents one of the few optimal paths for collateral that can result in competitive rates and larger facility sizes.
By combining invoice discounting with other finance products, we will deliver a comprehensive solution that meets both short-term and long-term finance requirements, providing payroll support, essential funds for expansion, and cash flow relief.
Our advisers will work with you to meet lenders’ criteria, exploring your business position to present an application that maximises your chance of success.
For an advantageous invoice discounting deal, you should prepare:
- Complete details of your accounts receivable, suitable to meet the size of the proposed facility.
- Comprehensive business accounting.
- Forecasts and plans for the funding use.
The lender will evaluate your application based on the information provided, as well as your business credit score.
For some facilities, lenders may also explore the creditworthiness of your customers, using their payment histories to help form a fuller picture for efficient underwriting.
Working with Clifton Private Finance means:
- Access to the full landscape of UK invoice discounting lenders.
- Comprehensive advice from an invoice discounting expert, well-versed in the recruitment sector .
- A thorough pre-approval process that evaluates your application with lender understanding prior to final application.
- Comparison with other debt finance options to ensure you choose the right funding structure to meet your business needs.
- Ongoing support for the full lifetime of your invoice discounting facility.
Book a consultation with Clifton Private Finance today.
