Invoice finance and factoring for recruitment agencies: funding a contract book that is growing faster than it is paid

You have won the best client of your life. Thirty contractors, rolling, good margin, a name that will open doors for years.

You also now pay thirty people every Friday, and that client pays in sixty days. Which means that before a penny of the margin reaches you, you have to find six or seven weeks of gross payroll out of your own pocket — and you have to find it again next week, and the week after, growing every time the client asks for another two people.

This is the specific way contract recruitment kills profitable agencies. Not a bad debt, not a downturn. Growth, funded out of a current account that was never big enough.

Why a contract book eats cash#

Permanent recruitment is a fee on placement. Contract recruitment is a working capital business wearing a recruitment business's clothes.

The mechanics: you pay the worker — or the payroll provider employing them — weekly or fortnightly. You invoice the client weekly or monthly. The client pays on their terms, which are sixty days, or ninety in practice once the invoice has sat in someone's approval queue for a fortnight.

Between those two events sits the gross cost of the placement: not your margin, the whole thing. Pay, employer's National Insurance, holiday accrual, pension. You are effectively lending your client the full cost of their workforce, continuously, and the amount you are lending scales directly with your own success.

For an illustrative planning exercise, list the actual weekly payments required for a contract and map them against expected client receipts. Include applicable employer costs and other obligations confirmed by the payroll owner. The cash gap depends on these amounts and dates; a gross-pay figure alone is not a complete estimate of the funding required.

The British Business Bank explains the main invoice-finance structures. Use its overview as context and the actual provider agreement for specific terms.

The facilities, and what separates them#

Factoring. The funder advances against your invoices and takes on the credit control — chasing your clients for payment in their own name. Confirm the collection process, client communication and total charges in the proposed agreement.

Invoice discounting. The same advance, but you keep the credit control and, on a confidential facility, the client need not know a funder is involved. Requires you to have a credit control function that actually works, because the funder is lending against a ledger you are managing.

Selective or spot factoring. You choose which invoices to fund rather than assigning the whole ledger. Useful for a single large contract or a seasonal spike. Ask the provider to compare total charges and the service scope against your actual use case.

Payroll funding through your provider. Some payroll arrangements include a funding element, so the provider pays the workers and carries the gap. Simple, and it ties your funding to your payroll choice — which is convenient until you want to change one and not the other.

Wider business funding. Term loans, asset finance, overdrafts. Different instruments for different jobs. A term loan is a poor way to fund a ledger that turns over every month, and a ledger facility is a poor way to buy a building.

The four numbers that decide whether a facility works#

The advance rate. The percentage of each invoice the funder releases immediately. Ask the provider to state the rate, eligible balance and deductions for your facility. Model the amount actually available against payroll and other payment dates, rather than assuming that the headline invoice total is available to spend.

The concentration limit. A restriction on exposure to a customer or connected group, as defined in your facility. Ask which ledger balance is used, which exclusions apply and how the restriction interacts with individual debtor limits.

If one client is expected to become a large part of your book, give the funder a forecast before the contract starts. Ask it to show how the changing ledger affects availability and what review or approval is needed. Do not assume that growth in invoice value creates an equal increase in available funds.

The total cost. Two components, and providers present them in ways that resist comparison: a discount or funding charge on the money advanced, usually expressed over a base rate, and a service fee on turnover. Then, frequently, arrangement fees, minimum-term commitments, minimum monthly fees, audit fees, refactoring charges on invoices unpaid past a set period, and a termination notice period.

Ask for the all-in annual cost on your actual projected turnover, in pounds. Every funder can produce this. A reluctance to do so is information.

The debtor quality. Providers assess the business and its debtor book using their own criteria. Give a clear account of customer payment history, disputes and expected changes. Ask how those facts affect the proposed terms rather than assuming that a client's size or sector guarantees a particular offer.

Questions to ask before you sign#

• What is the advance rate, and what triggers a review of it?
• What is the concentration limit per debtor, and what happens on the day I breach it?
• What is the all-in cost in pounds on my projected turnover, with every fee included?
• Is there a minimum term, a minimum monthly fee, or a notice period to exit?
• What is the recourse position if a client does not pay — and is any part of it non-recourse?
• How are disputed or credited invoices treated?
• What reporting will I have to produce, how often, and can my current system produce it?
• Will you require a personal guarantee, and over what?
• Which of my clients will be notified, and in what terms?
• How quickly can the facility scale if I double the book in six months?

Where funding is the wrong answer#

If the margin is too thin, funding makes the problem arrive faster. A facility lets you grow a book that loses money at a rate you could not otherwise have afforded. Before you fund a contract, cost it properly: gross pay, employer's National Insurance, holiday accrual, pension, the funding cost itself, and your back office time. If the margin does not survive that, the contract is not a good contract, and no funder will tell you so.

If the real problem is credit control, fix that first. Some agencies with a sixty-day nominal term are collecting at ninety-five because nobody chases and invoices go out with the wrong purchase order number. Compare the cost and practical effect of improving that process with the proposed funding arrangement. The operational investigation is back office work.

If you are being funded through your payroll provider and it suits you, leaving it alone is a legitimate answer. Separating the two gives you flexibility you may not need.

And a facility is not free money. It is secured against your ledger, frequently supported by a personal guarantee, and it carries a notice period. Agencies get into difficulty not by taking a facility but by taking one they did not read.

How Freelancer Supermarket helps#

We are an independent consultancy and an introducer. We are not a funder, we are not a broker of one lender's product, and we do not lend.

What we do is the assessment and the introduction. We look at your ledger — its size, its terms, its debtor concentration and the quality of the payers — at your margin and at how quickly you expect to grow, and we set out which structure genuinely fits: factoring, invoice discounting, selective, payroll funding, or something outside ledger finance altogether. Then we introduce you to two or three funders from a panel we have checked, with a reason attached to each name. Not a directory to work through, and not one lender we happen to favour.

We look across the whole market, including wider business funding where a ledger facility is not the right instrument.

It costs you nothing. The funder you engage pays us, and we are paid the same whichever one you choose, so we have no reason to steer you toward a particular product. If your existing facility is competitively priced and correctly structured, we will tell you that and leave it alone — there is no fee riding on the answer. Regulated financial and legal advice on the facility you enter comes from the regulated partner you engage, not from us.

Funding and payroll usually move together, because both are driven by the same thing: how many people you are paying, how often, and on what terms. If the routes across your book need work too, start with Every payroll option, assessed and matched: choosing payroll routes for a contract book.