Funding for Growth
Starting your own recruitment company was easy, when all you needed was a laptop, a phone, your contacts and you were off.
As your business grows, there are additional costs to consider, like systems, processes, staff, offices etc. There’s also the crucial matter of cash flow to think about and how you may fund your longer term growth plans.
Forecasting your perm and/or temp contracting supply is a good starting point, being realistic and clear about how much work you can expect to put through your business (over the next 1, 2, or 5 years), factoring in delays around placements and payments. Consider also the number of people you will need in your business to hit targets. You can then look at the how much funding you will need to give you the capital and cash-flow to meet your targets.
Once you’ve determined the level of funding you think you’ll need in order to secure a steady income for your business, it’s time to think about where the money will come from.
In the main, there are three variants for consideration, that are equally useful to fund sustainable growth. Debt Finance, Invoice Finance and Equity Finance. There are pro’s and con’s to each, although it should be considered sensible and also realistic that your aspirations for growth will be less likely to be achieved without a sensible, managed level of funding along the way.
Debt financing is money raised through some sort of loan, usually for a single purpose over a defined period of time, and usually secured by some sort of collateral.
Bank Loans, Overdrafts, Commercial Loans.
These financing methods can prove to be very effective as a short term solution or when you need a one-off cash injection for your business, but what about the next time you need some cash to be freed up?
If you’re in the temp/contracting sector you’ll know it’s vital to make sure your contractors are paid on time, which can sometimes be a challenge when the client hasn’t paid on time. There are some helpful finance solutions which can assist recruiters facing this issue, such as:
- Invoice Discounting (ID)
This is effectively borrowing against unpaid invoices to release cash flow. It is a solution close to ‘pure’ lending as you retain responsibility for chasing payments and managing the sales ledger. It does mean that you will be responsible for the majority of the administrative jobs that are needed for your business to run smoothly and this means cost to the business too, in terms of staffing and time for Credit Control, Payroll, Bad debt Protection, Invoicing & Sales Ledger Management.
This allows recruitment agencies to get ‘paid’ earlier. In factoring, you can sell your invoices to a factoring company, before the end-customer has paid. This means that for a relatively modest fee, agencies can get immediate cash flow and do not have to worry about chasing invoices. This facility typically includes many of the additional ‘Back Office’ tasks that need to be resourced and managed, including the burden of credit control with the end client.
- ‘Spot’/Selective Invoice Financing
Similar to the Invoice Discounting, but on a ‘selective’ basis, allowing you to go to market and seek a supplier that will provide finance against those invoices you select, rather than the whole of your ledger. Although this is more commonly used outside of the recruitment sector.
Equity Financing can be money from angel investors, venture capitalists, or Crowdfunding (£245m market volume in 2015, based on Nestra Report), in exchange for shares of the business and of any profits. Equity typically becomes a source of longer term, general use funds for the business.
Weighing up the costs and benefits of these types of financing will enable you to strike the right balance for your business, making sure you're not saddling your company with debt you can't afford to repay and minimizing the cost of capital.
In our world of recruitment, Invoice Financing can often provide sufficient cash-flow to meet your growth targets, without giving away equity. By choosing the right services and contractual terms for your business, it can meet your growth targets, adding value at the same time. A good partner will also allow their provision of services change to suit your needs whilst on your journey, adding real benefit as a long term business partner.
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