Scary truths about traditional funding

Throughout our 8 years of offering recruitment businesses invoice factoring solutions, QUBA Solutions has come across traditional funding or widely known as invoice discounting methods.
We’ve seen it happen again and again, agencies failing because the foundations they’ve built themselves on are unsuitable.
Cheap? Yes.
Flexible and reliable enough for growing recruitment agencies? No.

1) The Funding Level
The percentage of invoice value a traditional lender will provide can be anywhere between 70-90%; even 95% of invoice value. This can cause issues particularly when you are using an umbrella company, paying a VAT registered limited company, and even more so when working with international clients.

For example, an invoice of £1000 + VAT = £1200 factored at 80% would mean a drawdown of £960. You could be paying the worker anywhere between £800 to £900 which is a huge bite into your margin/cashflow – agencies on tighter margins (especially those signing up to Master and Neutral vendors) may find it untenable. In the event of disputes all cash can be frozen.

2) The cost.
Although the actual fee is usually cheap – it can be less than 1% (but remember they always charge on gross, so it is actually 1.2% net), the fee is complex.

If you examine the rate further, you’ll find you pay interest on borrowing, and this is usually high and will increase as the base rate does. Fees are payable every time you drawdown money and there may well be a monthly service charge.

In addition, you will have an outlay of other costs, such as sourcing your own pay and bill software, team members such as credit controllers or payroll managers and sometimes negotiating fees with credit insurers.

3) Reserves.
This can be a real issue – 90 day debt has usually some kind of issue around it, therefore the word issue would trigger an immediate reserve of the value of that invoice or invoices related to the end client. After 120 days the debt would immediately be reserved and any legal dispute would be the same. Therefore, less cash at hand for you to draw down on.

4) Credit Controller.
Most traditional factoring solutions require you to have your own Credit Controller or indeed payroll manager / internal clerk. Obviously, other than having to pay for that – what happens when they are away on holiday? Or leaves the business for whatever reason and you need to re-recruit?

5) The Technology.
One of the biggest differences is the tech used – traditional finance generally utilises Dancerace as a platform – a generic and complicated finance platform designed to cover ALL sectors and is certainly not niche to recruitment. It really is designed for finance professionals and assumes a lot of knowledge.

6) The people.
As mentioned above, it’s highly unlikely that a provider of traditional funding will be specific to the recruitment industry. This means the people you deal with there, will expect you to be the expert in everything surrounding your business. The support you receive will usually be minimal and you can’t lean on your bank to provide you with extra support or knowledge. Unlike recruitment specific funders. It’s also unlikely that you’ll have a go-to point of contact to ask questions or depend upon at a moments notice.

So what is the true cost of a cheap rate?

  • Less security on cashflow
  • More paperwork
  • Higher staffing costs
  • Less time available to grow your business
  • Hidden costs along the way
  • Less support
  • Greater risk of missing something that a recruitment specific funder could advise you on.