Adapting to cope: three reasons bank finance is bad for recruiters

Richard Prime

The reason the human race has survived into 2016 – and will probably persist for a good while after that – can be attributed to a single, simple fact: people are adaptable. But as behavioural strategist Max McKeown once said, there’s a difference between “adapting to cope” and “adapting to win”. 

Recruitment is generally inclined towards the latter: a slight advantage can become massive if you beat a competitor to a particularly coveted candidate, for example.

Recruiters are some of the most tech-savvy people: they’ve been using CRM systems for years, they adopted the internet rapidly, and they seized the potential of social networks like LinkedIn as soon as they became available to use.

However, when it comes to finance recruiters have clearly adapted to cope through no fault of their own. Bank finance is something no agency has any particular affection for, but it’s viewed as something of a necessary evil. Frequently, clients won’t be able to pay staffing firms before staffing firms need to pay contractors, and for a long time, banks have been the only way to bridge the funding gap.

Accordingly, these institutions have established something of a monopoly on recruitment contract finance. They set the terms, and those terms are often enormously unfavourable to recruiters. Here are three reasons why.

1.     Rigid contracts

One of the most restrictive methods that traditional financial institutions use to strong-arm the recruitment industry is the all-turnover contract. These arrangements often cover both permanent and temporary placements.

Over the course of these non-negotiable, fixed-term arrangements, the agency must make every placement through the bank. Typically, this agreement will also include service charges – which are paid upfront – and interest against the company’s “debtor days” (on top of the base rate). Use an alternative means of funding a candidate with a company, and you’ll be in breach of contract.

Many business partnerships are temporary, and won’t align with the length of your arrangement with the banks. If a client leaves early, you could also be affected.  

For their part, banks are unlikely to change this. It isn’t in their interest to alter what they, and their shareholders, believe to be a winning formula: they would lose out if they offered contracts on a flexible, client-by-client basis.

2.     Concentration limits

Banks penalise recruitment organisations for losing business but they also penalise the same organisations for retaining it. The terms and conditions of invoice finance typically mandate “concentration limits”, meaning an agency can keep only a certain portion of their total debt with a particular client. When it comes to smaller outfits that rely on a couple of large clients, this can be a serious issue; effectively, the bank won’t let them expand because it’s looking to minimise its risk.

This means that many ambitious agencies suffer from stunted growth: they can’t get the most out of existing clients, and, because they can only provide so many placements, they’re pre-emptively disqualified from signing new, potentially lucrative clients.

3.     Technophobia

If you’re an agency using a bank-funded contract finance package, you’ve almost certainly noticed that it’s a bit more analogue than you’d expect. Where electronic systems are used, they’re usually slow and lack all but the most rudimentary tech support.

The lack of tech isn’t an accident or oversight. Banks are generally acutely aware of the benefits of tech: their trading platforms are optimised to compute overseas stock trades in milliseconds; their online banking systems have contributed greatly to lightening the workload of tellers.

But they don’t extend these benefits to recruitment customers, mostly because they don’t feel they need to – staffing companies will use their services regardless. Again, why mess with a winning formula?

Established institutions tend to operate under the assumption that their dominance will last forever. It won’t. To assume that there is only one way to bridge the gap between when an agency has to pay its contractors and when an agency gets paid itself is a mistake. Alternative solutions to those that typically stifle growth and keep recruitment stuck in the past are in active development and are rapidly gaining traction. The banks’ reluctance to embrace cha
nge is coming back to haunt them. 

Richard Prime is CEO and co-founder of Sonovate