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For recruitment agencies, the key to success is maintaining a good flow of cash through the business, enabling it to pay wages, purchase raw materials and finance new equipment etc.
However, many agencies struggle when asked to make large capital outlays and then wait 30 to 90 days or even longer before receiving payment from clients. This problem is further exacerbated by the reluctance of the banks to provide higher levels of funding to agencies with low fixed asset bases.
But times have changed since the days when the bank was the first port of call for funding. The overdraft, which is based on how a agency has performed historically, is under pressure as new, more flexible forms of finance have emerged. One such alternative is factoring, also known as Invoice Finance, Invoice Discounting and Receivables Finance.
So why is factoring becoming the preferred finance option for an increasing number of Australian entrepreneurs?
1. Factoring is a more flexible form of finance
In its simplest terms, factoring provides a flexible source of finance by allowing recruitment agencies to unlock the funds tied up in unpaid invoices – leading to an immediate injection of cash. This is also referred to as discounting, though factoring offers an added service to collect, manage and administer the debt.
On receipt of an invoice from a client, a factor will typically pay up to 85% of its value within 24 hours. The factor then carries out the credit control on each invoice, on behalf of their client, sending out statements and chasing payment until it is paid. The remaining 15%, less a service fee, is handed over to the client once payment is received.
Another great advantage of factoring is flexibility. The amount of funding available is based on the sales you make, not on your historic balance sheets. Not only that but if your agency is doing well, then the amount of funding available increases because it is linked to your sales.
2. Cash flow and late payment hinder business growth
Cash flow is a huge problem for many recruitment agencies. For example, when you have to pay workers weekly, long before you can even invoice your clients, cash flow problems are bound to follow. Added to this, businesses must pay GST and other taxes monthly or quarterly. When the twin problems of cash flow and late payment converge, it is no wonder that many firms look towards alternative funding solutions like factoring to help keep them moving forward.
3. More business advisors are recommending factoring
Because it is such a powerful way to unlock business cash flow, more companies are taking advantage of factoring, more financiers are providing it and more business advisors are recommending it to their clients.
4. Factoring offers value for money
Compared to bank funding, the cost of money advanced through factoring is very competitive. What is often forgotten in a straight comparison of charges is that factoring includes a full sales ledger management service. This means that users of factoring enjoy enormous savings by eliminating the time burden of chasing payments and the cost of accounts receivable staff.
They also get the benefit of reduced late payments, and further savings can be made with suppliers by taking advantage of early payment discounts.
5. Factors work alongside their clients
It is not unusual for businesses, before they become factoring clients, to be concerned that they might lose control of their finances. Many are also worried that the establishment of a relationship with a factor will cause alarm among their customers, who might interpret this as a sign that they are in financial difficulties.
This is something of a hangover from old times. With a reputable factor, the client benefits from having a dedicated credit controller who, in effect, becomes an extension of the client’s team.
The factor works with the client to manage their sales ledger – chasing invoices and taking on the responsibility of collecting payments. A good working relationship with a client’s customers is just as important to the factor as it is to their client. Factors are more than aware of the importance of good client relationships. It is not in their interests to upset any relationships. The fact that the two have this interest in common means that the factor has to work closely with the client to fully understand the situation, their business and their custom.
RCSA Invoice Finance offer a range of flexible finance solutions to help businesses access the capital they need to grow. Speak to us today to explore your funding options.