Contract employment is a real sweet spot in the recruitment market – it’s worth £26 billion in the UK alone and is growing fast. In terms of financial stability, profitability, and the ability to more effectively service clients’ needs, contract recruitment is a winner. But as agencies have to pay contractors before they receive payment from their clients, this all begs one question: how do you fund it?
Traditionally, a lot of recruitment businesses rely on banks to secure the finance they need to run contractors. However, the lengthy contracts issued by these lenders contain pages and pages of small print that’s notoriously difficult to comprehend. If we’re honest, how many of us go through these sections with a fine-tooth comb? I would bet that far more of us fall prey to this habit than we might think. And ultimately, it’s our businesses that suffer from this approach.
The commercial reality is that banks aren’t set up to fund recruitment agencies placing contractors; they simply don’t have the industry knowledge or understanding of how the lending requirements differ. For example, many lenders will withhold up to 40 per cent of an agency’s profits, thereby hugely restricting cashflow and the ability to grow a business. Other fees liable are late-payment fees, meaning an agency is held financially responsible for a late-paying client, ancillary fees for services deemed outside of the contract terms, discount charges as interest on any cash advances, and re-factoring charges on any late invoices.
Likewise, a lot of funding contracts from banks contain terms that actually restrict the amount of business an agency can take from a single client. Known as concentration, this is a limit set by financiers because they consider high levels of concentration (i.e. a lot of contractors placed with one client) to be a greater risk on an agency’s sales ledger. The effect on an agency with a more concentrated contractor-client ratio is less money that will be advanced by the provider. From a bank’s perspective this might make sense, but in reality such inflexible procedures hinder a recruitment agency’s growth potential.
Just think of what all the money handed over in fees could do for business – new hires, the latest equipment, a bigger office space. By ignoring the warnings in the small print, it’s the agency that will suffer. And it’s not just the hidden fees that are inflexible and business damaging for recruiters placing contractors – the all-turnover agreements put in place by many lenders mean that when it comes to financing your business, it either all goes to them or you get nothing. If you want to finance one client using an invoice factoring product, for example, you simply won’t be able to: you need to run your whole contract book through the same lender, giving them the advantage for the whole term of the finance package. This is often lengthy, with contracts unlikely to last less than 12 months at best.
For start-up recruitment businesses, these finance terms are particularly unattractive. When you’re leaping into a business that could be very different in a year’s time, do you want to tie yourself to a long contract? It’s unlikely you will.
It’s vital, then, for recruiters to read that small print. What you believe you are getting and what you will actually receive can be poles apart – and often only a detailed, almost exhaustive study of the small print will reveal the truth behind the marketing speak. Look for flexibility, no hidden fees, and knowledge of the industry when you’re hunting for the best ways to finance your business, and you won’t go far wrong.
By Richard Prime, CEO of Sonovate
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