Cash flow management can be a significant challenge for recruitment businesses, particularly those with a temporary or contractor base. Extended payment terms from new or existing clients can cause real problems especially when a worker is paid in advance of receiving payment from the client.
Asset based lending (incorporating invoice finance) enables businesses to raise finance against unpaid invoices, thus accelerating cash inflow.
How can asset based lending be used in the recruitment sector?
Cash released against temporary and/or permanent placement invoices can assist with:
- weekly payroll;
- monthly staff costs;
- business overheads;
- organic growth; and
- extending credit terms encouraging client growth or retention.
Confidential facilities are readily available and can include protection against debtor insolvency or non-payment. Facilities can be structured as either full service (including funding, back office/payroll services and credit control) or simply the advancement of cash.
Management buy outs / management buy ins
Management buy outs are perceived as lower risk by lenders because the successors are already integral to the business, hence less chance of flight risk. However, there are many independent providers that will finance management buy ins, subject to understanding the post transaction investment/strategy.
Lenders can leverage the asset classes of both the acquirer and target company, subject to there being no prior secured charge holders. This enables management teams and/or shareholders to finance strategic growth.
Key stakeholder exits
This can include founder shareholders, private investors or private equity sponsors. Assuming the business meets its short to medium term strategic objectives, exiting key stakeholders can put immense pressure on liquidity. An invoice finance or asset based lending facility can be an efficient way to help execute an exit.
How do lenders view the recruitment sector?
Both invoice finance and asset based lenders class staffing and temporary recruitment agencies as a preferred sector, despite often excluding or restricting funding on recruitment process outsourcing (RPO) and permanent placements. That said, lenders will take a view on ‘pay when paid’ clauses, common with RPOs, subject to their overall level of exposure and, in some cases, the provision of additional security from shareholders. They can also finance invoices for permanent placements, subject to clawback periods and the future cash requirement.
What do lenders focus on when assessing a recruitment business?
Lenders ideally want to see accurate information presented in an acceptable format, and in a timely manner. Lenders will always undertake an element of due diligence, depending on the complexity of the funding or the transaction. They generally require consolidated forecasts where some form of transaction is evident. In instances where this isn’t the case, the lender will work proactively with the management team or their advisors to understand the forecast position, prior to funding. Lenders will always consider how the receivables could perform if the business fails to meet its ongoing liabilities. This drives their exit strategy and underpins the level of advances against the unpaid invoices.
What should recruitment businesses do if they have cash flow challenges?
Take some time to review your current financing arrangements, terms and financial covenants, or feel free to contact RSM who will help you:
- discuss your current strategy and challenges that you may face moving forwards;
- review your current financing arrangements and highlight potential options for improvement; and
- consider the impact of any new financing arrangements on your current position.