Run payroll before the client pays.

Recruitment agencies need funding because they pay workers before clients pay them. Temps and contractors are paid weekly, while the client pays the invoice on credit terms, often a month or more later.

The gap grows with success. Each new temp adds to this week’s payroll and to an invoice that will not be paid for weeks, so a growing agency can be profitable and short of cash at the same time. Recruitment finance is the general name for the funding that covers that gap.

Invoice finance for recruitment agencies turns each client invoice into cash when it is raised, not when it is paid. The facility grows as you bill more, which is why it suits temp and contract desks.

1. Your temps submit approved timesheets for the week.
2. You invoice the client and send the invoice to the lender.
3. The lender advances a percentage of the invoice value.
4. You run payroll from that advance.
5. The client pays, and you receive the balance less the lender’s fees.

With factoring, the lender collects payment and your clients know about the facility. With invoice discounting, you keep collecting yourself and the facility is usually confidential.

Some providers supply the funding alone, and others bundle it with payroll, invoicing and credit control. The bundle costs more and removes administration, which matters most to a new or small agency.

Permanent placement agencies have a different problem: no weekly payroll to fund, but uneven income and fees that can be refunded. Consultants’ salaries and job-board costs are paid every month, while placement fees arrive in lumps.

Agencies that bill for projects as well as placements share a pattern with other professional services firms.

Lenders assess the quality of the invoices more than the agency’s own balance sheet. The questions are whether your clients will pay, and whether anything could let them dispute the invoice.

• Debtor book quality: the credit strength of your clients and how long they take to pay.
• Concentration: how much of your billing depends on one client.
• Contracts: signed terms of business, approved timesheets and clear rates.
• Sector and worker type: the sectors you supply and how workers are engaged.
• The directors: experience in recruitment and personal credit history.

Watch the terms that decide what the facility really costs and how easily you can leave it. Offers vary widely on these points, so compare them line by line.

• Concentration limits: a cap on how much one client can make up reduces what you can draw.
• Minimum fees: a monthly or annual minimum is charged even if you bill less than planned.
• Contract length and notice: a long term with a long notice period is costly to exit.
• Personal guarantees: directors are often asked for one and become personally liable.
• Recourse: under most facilities, an invoice the client does not pay comes back to you.
• Extra charges: ask for every fee in writing.

Capzy is a credit broker, not a lender, and gets paid by the lender. Our guide on how to compare business lenders shows how to read an offer beyond the headline rate.