“Cash is King” and don’t forget it. It is estimated that anything like 90% of small businesses fail due to cash flow issues and poor financial management. So if you are running a temp agency, or plan to start one, invoice factoring or discounting could be the help you need.
Why do Temp Agencies experience cash flow issues?
Temporary staff need to be paid weekly, fortnightly or monthly regardless of when the client pays the agency. Any small business owner knows the pain of slow paying customers and that writing 30 days payment terms on your invoice doesn’t necessarily mean your client will follow your terms. So no matter how long your client takes to pay you, your temp staff will expect to be paid on time and not doing so can ruin your business.
How does Factoring help?
Factoring is a way to bridge the gap between paying your staff and your customer(s) paying you. The specifics of each invoice factoring or discounting arrangement will vary however the principals are:
1) The invoice sent to each customer is effectively sold to a ‘factor’, so every time you raise an invoice to your customer the factor needs to be told it has been raised and sent out. That invoice will include the bank details of the factor – they own the invoice and will collect the payment.
2) Once the factor has been notified that the invoice has been sent to a client, they will pay you a percentage of that invoice, for example up to 90% of the invoice value, less any assignment charges. They may do some checks to satisfy themselves the invoice is real, such as ask for the backing time-sheets or for a new client will conduct a credit check on their business to confirm their status.
3) Depending on the specific arrangements the factor may undertake credit control and even offer protection if the debts go bad so you are not liable for amounts you have been given on the invoice.
4) When the customer pays the factor for the full amount of the invoice then balance, which in our example is 10%, will be paid over to you less any charges and interest.
Factoring is one of the most popular methods of finance within the temp recruitment industry because it bridges the gap between needing to pay staff for work which your client has not paid you for.
What does a Factor look for when setting up a facility?
A Factor needs to be content that the invoices they are buying will be paid and not go bad, leaving them out of of pocket. So whether you are a start up agency or an established firm with several years of trading behind you, the first thing they will want to see are the clients you have or intend to make placements with. They will actually assess your clients credit worthiness and ability to pay, not just your own business and experience as a recruiter.
Should I Find an Accountant to help me?
Yes! An accountant can help you by:
1) A potential factor will ask for financial forecasts so an accountant can put together a realistic 12 month forecast, including profit & loss, balance sheet and cash flow in a suitable format to make sure you receive the right quotes from different factors with fair charges. If your financial forecast is too high you can find yourself contracted to excessive minimum charges, so make sure you get it right.
2) If you have the right back office processes in place to raise invoices on time, manage the process of sending them over to the factor and reconcile ledgers, it will add comfort to the factor and has the potential to reduce charges. Consider using a day to day accountant or engage a freelance accountant on a regular basis to manage the invoicing discounting process on your behalf (just make sure your accountant has experience with invoice discounting and factoring facilities).
3) An accountant may be able to recommend a reliable Factor to you, who offers a competitive rate.