With bank interest rates remaining at an all-time low, now must surely be the right time for recruitment companies to seek funding to help their businesses. Colin Cottell looks at the options

Finance is always important for recruitment companies, but it is absolutely essential when they are looking to grow. With recruitment activity on the rise, according to the Reed Job Index for May, and official growth figures for the UK recently upgraded, now could be a good time for staffing companies to seek funding for that long hoped for growth.

While a variety of types of finance are available, for many recruiters finance is synonymous with invoice discount finance. Invoice finance bridges the gap between a staffing company paying its temps and contractors, and when it gets paid by its client. Recruiters also like it because the amount lent can flex with the number of temps.

According to Mark Critchlow, an invoice finance specialist at Clearview Corporate Advisory, with bank overdrafts harder to get these days “invoice finance has become the norm”. However, obtaining invoice finance is far from straightforward, he says. 

While for many recruiters a high-street bank is the natural port of call, Critchlow says they aren’t always the best bet. “If it’s the right client the high-street banks are really good,” he says. However, banks tend to be more conservative, he says, and recruiters who have come out of administration, for example, may find it impossible to get funding from them.

Critchlow advises recruiters to approach a number of different finance suppliers and compare what they offer. “If it is a nice profitable business that is growing, speak to two or three suppliers,” he says. But he suggests six if sending contractors out to a difficult market, such as Kazakhstan. “The more difficult it is, the more competition you should create,” he adds.

Agreeing the details of a deal is also vital, says Critchlow, who suggests that an 18-month contract, with three months’ notice, should be generally acceptable. Three months is about how long it takes to put together a new invoice finance deal from scratch, he advises.

Critchlow adds the most common pitfall made by staffing companies is they focus on the price of the deal — a certain percentage over base rate and a service fee, and on the percentage headline advance — for example, 85% of their debts. He suggests they should instead look at “how much money they are going to get six months into the relationship”.

Suppliers will take different views on which staffing companies are a good risk, he says. One might refuse to lend to a staffing company that is too reliant on one client, while another might not be prepared to lend if the agency’s contractors are in Australia. “You need to go to a company where the nature of your sales ledger isn’t a problem,” says Critchlow. 

Sean Dixon, head of services sector at Royal Bank of Scotland (RBS), says he has started to see a pick-up compared to 12 months ago, with oil & gas, education and IT seeing a number of deals. 

Dixon says that from RBS’s perspective, providing funding to staffing companies in heavily cyclical sectors such as financial services, “will be less attractive” than to “more stable sectors”, such as nursing and education. 

He points out that as a result of the government’s Funding for Lending Scheme, under which banks can borrow money at a lower rate as long as they lend it on to SMEs [small and medium enterprises], RBS has been able to cut interest rates by up to 1.7%, as well as reducing some arrangement fees.

Mark Byrne, managing director of Calverton Finance, says invoice finance providers “are falling over themselves to offer facilities”. However, he warns that not all deals are the same, and before entering into a contract, agencies must be sure that the basic, if seemingly obvious, requirement — making funds available to pay its temps — is met.

“If your finance provider starts imposing limits on funding — for example, by imposing credit limits on certain clients or on overall funding, and you are not expecting these, it can become a problem,” says Byrne.

Byrne also advises recruiters to take advantage of the wide range of facilities on offer, to pick the one that best meets their needs. Facilities range from simply providing finance to a complete service covering invoicing, payroll, credit control, bookkeeping and finance itself. Factoring, where the finance provider is responsible for credit control, is another variation, and particularly suitable for young and fast-growing recruiters, where staff time would be better spend on growing revenue, says Critchlow.

Andy Hogarth, chief executive officer of temporary staffing group Staffline, says that invoice finance can be attractive for staffing companies, with some very good deals available. However, he suggests that it is most suitable for companies with a turnover of less than £10m. Above this size a bank overdraft “is normally cheaper than invoice finance”, he says. “For bigger and more established companies, financing growth out of retained profits is the best way because you are not paying any interest,” Hogarth says. 

Paul Saunders, consultant at Leonard Curtis Business Solutions Group, says that now is a good time for recruitment companies to borrow to fund growth because interest rates are low and likely to remain so for at least the next two years. “There is not much risk in companies taking on debt,” he says.

Saunders says that for those companies that can articulate clearly to lenders what they want the money for, the market is “well supported” by lenders and “there are going to be plenty of people willing to lend”.

Saunders advises recruiters to challenge providers, so they avoid signing-up to “onerous guarantees and covenants, and termination agreements”. “Make sure you understand the implications of taking on that agreement,” he adds.

Byrne agrees that recruiters should be careful what they sign up to, and highlights four common pitfalls for recruiters, with suggested remedies (see Top Four Pitfalls, below).

According to Richard Prime, joint CEO of recruitment industry development platform Sonovate, there is a strong demand from recruitment agency start-ups for £10k-20k. Prime says that while he has seen cases of people using personal loans to launch staffing companies, he hasn’t come across any examples of recruiters going into a bank with a business plan and coming out with £100k. “If you already have £5k the banks will lend you £5k, and if you have £10k they will lend you £10k,” he says. 

Prime says that in some cases banks are prepared to provide funding but only for a significant stake — 51% in some cases. “A few of them [recruiters] succumb to it, but a lot walk away from it because of the [small] amount they would get for their equity,” Prime says. 

RBS’s Dixon says the key to successfully obtaining funding for growth from the bank is being prepared. There are a number of questions that funders will look to ask recruiters, and anyone approaching RBS would be well advised to have thought through their responses (see Key Questions, below).

Dixon says “the most important thing” is that recruiters “need to be prepared to be challenged by the bank”. One key area is “sensitivity analysis”, he says and being able to answer questions such as “what if you were to lose a key client”. “They need to be able to answer these questions,” says Dixon. “If you have thought this type of question through, you will come across as credible and you will make a much stronger business case.”

The jury is still out on the strength of the UK economy, but even if recruiters aren’t convinced that the corner has finally been turned, with interest rates remaining low, for any staffing companies aiming to grow now would be a good time to at the very least consider their funding options.

Colin Cottell

Key Questions  

Key questions for securing growth funding, by Sean Dixon, head of services sector at Royal Bank of Scotland

1 What do you do that makes your business stand out?

2 What is your target audience, and where will you win business?

3 What is your relationship with your key suppliers and your key client targets?

4 Do you understand where your competition sits?

5 Can you present your financials, including your budget, and cash flow?

Top Four Pitfalls

Top four pitfalls for recruiters seeking invoice finance, with suggested remedies, by Mark Byrne, MD Calverton Finance

1 Pitfall

Getting stuck in a long term contract       

Remedy

Negotiate a trial period — say three months

2 Pitfall

Failure to understand you may not get 90% of the sales ledger

Remedy

Check the potential funding restrictions 

3 Pitfall

New start-ups not having a VAT number

Remedy

Apply for a VAT number as early as possible

4 Pitfall

High minimum charges 

Remedy

Ask for this to be waived