Recruitment factoring: a cash flow solution for agencies

Recruitment factoring, also known as invoice factoring, is a popular source of finance for recruitment agencies – particularly those managing temporary staff or contract work. By converting unpaid invoices into immediate cash flow, recruitment factoring allows businesses to keep their operations running smoothly without waiting for clients to pay their invoices.

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How recruitment factoring works

Recruitment factoring involves selling outstanding invoices to a factoring company. Typically, the factoring company will advance a large portion of the invoice value (up to 90%), with the remainder paid to the agency once the client settles the invoice, minus a small service fee.

For instance, if a recruitment agency issues a £10,000 invoice with 30-day payment terms, it may receive £9,000 immediately from the factoring company. The remaining £1,000 (less fees) is paid once the client settles their bill. This process ensures agencies can meet payroll obligations, pay contractors, and invest in growth without delays​​​.

Why do businesses use recruitment factoring?

Managing cash flow is a significant challenge in the recruitment industry. 

Agencies often have to pay temporary staff weekly, while waiting up to 90 days for clients to pay invoices​​. Recruitment factoring provides the flexibility to bridge this gap, especially for contract or temp recruitment agencies that rely on ready cash flow to operate smoothly.

For permanent recruitment, factoring is less common but still possible. However, it tends to be more expensive due to the higher risk perceived by factoring companies. Factoring companies often view permanent placements as riskier because cash flow issues are less frequent in permanent recruitment​.

What are the benefits of recruitment factoring?

1. Immediate cash flow: Recruitment agencies can access cash as soon as invoices are issued, ensuring they have the liquidity to meet their payroll and invest in growth opportunities​​.
2. Reduced administrative burden: Many recruitment factoring companies also offer additional services like credit control, invoice management, and payroll services. This is particularly useful for smaller agencies that may not have a large in-house finance team​​.
3. Flexible funding: Factoring companies offer funding solutions that scale with the agency’s growth, ensuring that as an agency wins more business, their financing grows with them​.
4. No need for assets: For invoice factoring, the invoices themselves serve as the collateral for the finance, meaning agencies don’t need to risk any physical assets.

Types of recruitment factoring

• Temp recruitment factoring: This is the most common form of factoring, where agencies pay contractors or temps on a weekly basis, long before clients settle their invoices. Factoring allows these agencies to avoid cash flow crunches with longer payment periods​.
• Permanent recruitment factoring: While less common, some factoring companies do offer solutions for permanent recruitment. However, due to the nature of the work, this tends to be more expensive and harder to secure​.

Choosing the right recruitment factoring company

Choosing the right factoring company can make a significant difference in how efficiently your agency can access credit when you need it. Factors to consider when comparing recruitment factoring companies include:

• Prepayment percentage: The amount the factoring company will advance upfront. This can range from 80% to 90% depending on the company and the specific deal​.
• Service fees: These can vary significantly between factoring companies, so it’s important to compare costs upfront. Some companies charge a flat fee, while others may take a percentage of the invoice​.
• Additional services: Many factoring companies provide additional services such as credit control, invoicing, and bad debt protection, which can be useful for agencies looking to reduce their administrative burden and outsource more tasks.

Factoring for small and medium recruitment agencies

Factoring is especially useful for SMEs in the recruitment sector. Smaller agencies often lack the financial buffer to wait out long payment terms from clients, making immediate access to cash critical. Additionally, many factoring companies offer tailored solutions for startups and growing agencies​​​, increasing the options available.

The impact of factoring on recruitment agencies

Recruitment factoring enables agencies to focus on growth and client acquisition rather than being bogged down by cash flow issues. By outsourcing back-office functions and maintaining a healthy cash flow, agencies can reinvest in their businesses, scale their operations, and take on more clients.

Moreover, invoice factoring helps recruitment agencies maintain a stable workforce by ensuring that employees are paid on time. This stability is particularly important for agencies that rely on temporary or contract workers, who may leave for other opportunities if payments are delayed​.

Alternatives to Recruitment Factoring

For agencies that prefer not to use traditional factoring services, there are alternatives that can help keep the business running without relying on invoices.

Short-term loans

When it comes to closing gaps in cash flow or meeting unexpected expenses, a short-term loan can provide breathing room while enabling businesses to manage their borrowing flexibles. The iwoca Flexi-Loan is designed for businesses that need fast, flexible funding without a lengthy application process or being tied into a long term agreement.

• Loan amounts: Borrow anywhere between £1,000 and £1,000,000, making it suitable for both short-term cash flow needs and larger growth investments.
• Flexible repayment terms: Choose a repayment period that suits you, ranging from 1 day to 60 months, with no penalties for early repayment, so you can control your cost of borrowing.
• Fast funding: Receive funds as quickly as the same day, helping you keep up with your business’s needs and keep employees paid.
• Transparent pricing: No hidden fees or confusing terms. iwoca provides upfront pricing so you know exactly what you're paying for from the start.
• Interest on outstanding balance: You only pay interest on the amount you’ve drawn down, not the total loan amount, helping you minimise overall borrowing costs.

Payroll loans

When it comes to paying your employees, a payroll loan can help you cover your end of month costs and meet your deadlines. After approval, the funds are deposited into the business's bank account, and the business can then use the money to pay employees. 

Is recruitment factoring right for you?

For many recruitment agencies, factoring offers an efficient solution to cash flow problems. Whether you're a small agency just starting out or a larger firm looking to manage growth, recruitment factoring provides the liquidity needed to keep operations running smoothly. 

If you want to find out more about how iwoca’s small business loans can provide a more flexible way to manage your credit needs, why not check out our small business loans calculator?