14 July 2022
Lenders continue to show strong interest in the recruitment sector. Greg Moreton, debt advisory specialist, explores debt financing options for recruiters.
Lender appetite for the sector – working capital and transaction financing
Lenders continue to show strong interest in the recruitment sector, both on the temporary and permanent side.
- ABL (asset-based lending) is how the temporary recruitment sector has traditionally been financed. There is often a funding gap between the salary payments to underlying workers and the payment of invoices from customers received by the agency.
- ABL lenders fund this gap, typically with an effective advance rate of around 70 per cent of the trade debtor book. Exact amounts will vary depending on the strength of the debtor book.
‘The recruitment sector is popular with lenders and can attract debt financing for both working capital and transactions, such as M&A.’
Greg Moreton, Head of debt advisory at RSM
- Cash flow lenders, such as banks and debt funds, often prefer permanent recruitment agencies because of their perceived strong cash flows. Past concerns over clawback risk have lessened considerably in recent years, as clawback is rare in practice and so lenders have become more comfortable with the business model.
This type of financing is structured with a view to the cash flows, and based on a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization). It’s well-suited to financing mergers and acquisitions and other medium-term transactions.
- Transaction financing for the temporary sector is something that can now be achieved via ‘ABL+’ If most or all of a recruiter’s debtor book is already committed to finance working capital, as is commonly the case, this does not leave any spare capacity for transaction finance under the ABL borrowing criteria.
The best way around this is ‘ABL+.’ In this case, the ‘+’ would be a multiple of EBITDA being lent on top of the working capital lending, typically around 1.0x-1.5x. This can either be from the same lender doing both legs of the transaction, or through a second lender willing to be subordinated to the ABL lender.
Debt markets overall remain buoyant, EOTs a key theme
Debt appetite in the bank market is a mixed bag, with some lenders more enthusiastic than others, but not always consistently. Private debt funds, on the other hand, remain a strong feature of the market, and are keen to deploy the capital they have raised.
Overall, lenders remain cautiously optimistic. There hasn’t yet been a wholesale tightening of appetite / pricing, and there is still a lot of forbearance for borrowers in difficulty.
Employee ownership trusts (EOTs) have become an increasingly common use of funds in debt transactions. This type of transaction is usually the most tax-efficient way to complete the sale of a business. As there is typically no new cash equity available, debt plays a key part in getting a cash payment to the vendor.
RSM debt advisory
The RSM debt advisory team is a dedicated mid-market advisory team that helps businesses to obtain debt funding. The team has a track record of successfully raising debt across all types of transactions, be it growth capital, acquisitions, or simply a refinancing.
The team is highly experienced and can add value to the debt raising process in a variety of ways, helping to market the borrower to lenders and negotiating the best possible deal.
For more information, contact Greg Moreton to discuss your business needs.