The labour hire and recruitment sector is commonly known to be a desirable segment for many invoice financiers, and in fact some 20% of total clients using such facilities are in these sectors, according to DIFA[i] showing that the solution is adding a lot of value to businesses in this sector. There are several reasons why invoice finance works so well with this sector, and some of the key reasons are outlined below.
Inherent cash flow challenges
Firstly, let’s consider the commodity being sold – labour. There is no stock being bought and sold, but instead it’s the skills, experience and time of the contractors. By comparison therefore, the cost structure of many labour hire and recruitment businesses is very much weighted towards wages. Not only that, but with the typical labour hire business often placing short term contracts or temporary staff, this equates to large, regular outgoings which can be very challenging to meet. This is exacerbated by the fact that average trade payments have hovered between 50-55 days on average, so cashflow is highly stretched. Many debtors to such companies are also larger organisations wanting to maintain a flexible workforce and there is a known strong correlation between the size of a business and the time it takes to pay invoices.
For many businesses, managing working capital is a constant juggling act and for labour hire and recruitment firms it is no different. However, where for example a manufacturer may be in a position to delay payment to a supplier to manage cashflow, this is not an option available to recruiters or labour hire firms, meaning any cashflow issues associated with late payment are often an lot more acute.
For those businesses providing permanent placements, they also carry the risk of a candidate not working out, at which point the recruiter will be able to invoice, hence any cashflow interruptions can have significant impact on the business trading performance.
Growing young businesses
Many businesses in the labour hire and recruitment industry are also generally smaller and growth-oriented, looking to take advantage of opportunities and grow their client base and pool of candidates. In addition to managing day to day cashflow, this growth can put further stress on cashflows as expenses increase.
In addition to being smaller, some are often younger businesses without the trading history or recent profitability to be attractive to traditional banks for funding which is where invoice finance can become a very attractive option.
Macroeconomic and labour market factors
The broader economic and business environment has also played a part in terms of the suitability of invoice finance to the labour hire and recruitment sector. The increased casualization of the labour force and staff churn experienced in the modern workforce has meant that the recruitment and labour hire sectors have experienced broad based growth, as employers show a preference for flexible workforces in the face of market uncertainty. As a consequence, many firms have growth opportunities but cannot fully realise them due to cashflow and funding constraints which provides opportunities for debtor finance providers whose solutions resolve both issues, and overcome issues of inadequate security.
The proliferation of recruitment firms and their growth has also presented merger and acquisition opportunities for larger, more established providers. Such scenarios require significant capital which may not be accessible through traditional sources such as against real estate property. In these situations funding can be raised against the debtors ledger (typically up to 80%) to put towards the purchase price, with any excess funds used to fund working capital during the early stages of the merger or acquisition which tend to be quite capital intensive.
Service businesses and their cost structure
By their very nature, labour hire and recruitment businesses are services businesses, so their cost structure is quite different to other business types. They can be and often are run very lean in terms of their overheads. Often this means that there may not be the strongest imperative to hire accounts receivable staff to manage cashflows, which consequently may lead to blow outs in debtor days. This often means the additional cashflow support provided under the debtor finance facility can add significant value as it not only mitigates the risks of poor cashflow, but saves the business investing in headcount and incurring the overhead costs associated with credit control.
A note about permanent placements for recruitment businesses
One caveat to Invoice Finance’s suitability for the sector is in the funding of permanent placements. Most recruitment firms will seek payment after an agreed period of time has elapsed for the candidate to be tried and tested. There are situations in which this period is not reached. In this case a the financier would ordinarily have advanced on the invoice and would be left exposed, so for this reason invoice financiers have historically had some difficulties with advancing funding against permanent placements. More recently however invoice financiers have shown an increased willingness to fund against these invoices if a strong history of trade with the customer can be shown based on high percentage of successful placements and if there are also temporary invoices funded against. It is important to explore this in detail with each financier.