Recruitment firms warned against hidden financing costs

With the UK’s decision to leave the European Union affecting the level of funding that Britain’s financial institutions are prepared to provide, recruitment business owners are being urged to take a cautious approach to financing.

Simplicity, a UK-based provider of recruitment finance and outsourced administration solutions, says that while there are many benefits to traditional factoring finance options, the downsides to doing so are often overlooked.

David Thornhill, Managing Director at Simplicity, said: “Many factoring providers will attempt to seduce recruitment business owner with headline rates. But this is likely to be a false economy.

“Agencies will pay interest on the amount advanced and there will be an additional amount to cover the finance provider’s administration costs. Then there is the fact that the longer it takes some clients to pay, the more expensive the factoring facility becomes, with interest continually accrued over time.

“Not only that, this will also reduce the total amount that can be borrowed. So not only will the agency incur additional costs, both their profit margin and access to available funds will be significantly reduced too.”

The company, which has worked with hundreds of recruitment start-ups over the last 10 years, has found that despite the continued growth of the recruitment industry, many agencies are being held back by restrictions imposed by their finance providers.

“Factoring, by default imposes a concentration limit – the maximum amount the provider will cover for a single client. For those agencies working with clients that account for as much as 20% of their overall billings, there will be concentration limits in place restricting them from gaining access to those funds.

“This is not only slowing their overall rate of growth, in some cases it is putting a strain on agency’s cash flow and their ability to cover their essential outgoings.”

One of the biggest concerns that many former users of factoring service providers report is the lack of understanding within the agency community over the ramifications associated with using a factoring provider.

David elaborated: “The difference between a finance provider that truly understands the nuances and challenges recruitment business owners face and those that don’t becomes obvious every time you reach the point when the product or service you have no longer seems to be the one that is right for you.”