We asked Touch Financial Consultant Sam Sandhu for guidance on how to successfully fund a recruitment company.
1. So it’s your first ‘Ask an Expert’ at Touch Financial; what made you want to get involved?
Hi. Yeah I’m glad to help out. I have seen a couple of the previous ‘Ask an Expert’ articles and was interested in what the next theme was going to be. I have been working at Touch Financial for several years now and funding recruitment businesses is something which emerges time and again.
2. So what are the common problems with funding and operating a recruitment company?
Over the past few years, there have been numerous recruitment firms seeking finance guidance from the Touch [Financial] team. Most recruitment firms hit the cash flow barrier right away due to paying their staff weekly or fortnightly and being paid by their clients on a monthly basis. This leaves their operations starved of cash as they are paying wages with cash the firm has not yet received. A recruitment firm with the staff supply as well as the demand for their services should be growing larger and larger each year, but cash flow constraints affect how far this growth can go.
3. What guidance would you give to recruitment firms to help overcome this cash flow issue?
Firstly, I want to highlight that bank overdrafts and loans are not the ideal solution to help a recruitment company’s cash flow. I mention this because so many recruitment firms look to their bank for an overdraft, only to be rejected due to a lack of security and historical data. Traditional banking facilities are not only difficult to secure, but usually limited to a specific amount meaning firms receive only a small amount of breathing before the same cash flow problem comes back around.
My guidance would be to look at invoice factoring which advances a percentage of the cash tied up within invoices which have been provided on credit. Effectively, this means the monthly income for the recruitment firm will be bought forward a month so that income is ahead of the weekly payments of staff – which is a nice fit.
4. How do the costs of invoice factoring compare to other solutions?
Whenever I’m talking to a prospect about the costs of invoice factoring, I direct them to the invoice finance calculation tool on our website. This gives a pretty close indication on the amount of cash a firm can be advanced by the lender and the costs involved in doing so. I would suggest recruitment firms use the average of a 90% advance rate, although this can be as much as 100%.
Like for like, the costs of invoice factoring do usually end up a bit more than a bank overdraft or loan. However, it is essential to look at the amount of cash which is made available to a business with invoice factoring. Invoice factoring could end up providing as much as four times the amount of cash to a recruitment firm compared to an overdraft, removing finances and cash flow as an obstacle for growth.
5. What should a recruitment company do if they are seeking finance?
It is important to realise that there are different invoice factoring lenders available specialising in different sectors and business sizes. Working at Touch Financial, I am connected with the over 30 of the top invoice factoring lenders in the UK and would be more than happy to assist. You can get hold of me by calling 0845 388 9725 – our services are entirely free of charge.
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