Recruitment firms’ overdrafts cut by over a third

The value of recruitment firms’ bank overdrafts has fallen by 37% in just five years as banks are forced to cut their exposure to the sector.

That’s according to online business finance supermarket Funding Options, which says that the value of business overdrafts in use by recruitment firms has fallen from £313 million in 2010 to £196 million in 2015.

Banks are continuing to reduce their exposure to unsecured lending to small and medium businesses, and to sectors that are deemed ‘higher risk’, due to capital holding requirements placed on banks by regulators in the wake of the credit crunch.

Aa a result, this has made smaller businesses, and sectors where businesses do not always have reliable cash flow, targets for reductions in unsecured lending as banks continue their efforts to de-risk their balance sheets.

Recent research from Funding Options shows that banks have cut £100 million per month from the overdrafts of small businesses over the last 18 months

The company says that banks are looking to reduce their exposure to recruitment firms in particular, due to the inconsistent cash flow that is endemic within the sector. Recent research by law firm EMW showed that recruitment companies face an average wait of 56 days for payment from their clients, compared with a national average of 21 days.

Conrad Ford, CEO of Funding Options, commented: “Unpredictable cash flow cuts both ways for recruitment firms – it’s the reason why they need overdraft facilities, and the reason why their banks withdraw them. An overdraft withdrawal can come with virtually no warning, and can leave an otherwise successful business scrambling to cover costs during a period of weaker cash flow. Recruitment companies rely on the cooperation of their clients to get prompt payment on their invoices. Firms may not want to challenge any delayed payments in case they alienate significant clients.

 “It’s vital for recruitment firms – and for all small businesses in the UK – to have a contingency plan in place should their bank suddenly withdraw their overdrafts, as has happened to so many others since the recession. There are alternatives to a traditional bank overdraft for a small business looking for finance – options like invoice finance and revolving loans can step in where a bank has withdrawn and make sure short-term cash flow issues don’t become a bigger problem than they need to be.”