What is factoring and why is it important?
A factoring company is possibly the single most important supplier a contract recruitment agency can have, after your contractors themselves.
Invoice factoring keeps your company cashflow manageable. For recruitment companies placing temps or contractors, you need to pay your contractors (often months) before your client settles your own, outgoing, invoice.
Factoring companies make this possible. Here’s how:
- Contractor submits timesheet and invoice to agency.
- Agency raises outgoing invoice for client.
- Agency assigns (sells) outgoing invoice to factoring company.
- Factoring company immediately pays agency a percentage of invoice amount. Percentage depends of credit-worthiness of client.
- Agency immediately has sufficient funds to pay contractor. Contractor is happy.
- Agency can forget about chasing invoices. Client pays factoring company directly. Any delays, it’s the duty of factoring company to pursue outstanding amounts. Agency is happy.
- Once client has paid, factoring company transfers balance to agency’s account, minus their administrative charge. Factoring company is happy.
It’s as simple as that.
You should communicate in advance to your factoring company which clients you’ll be working with. They’ll get back to you and tell you what credit limit they’ll be happy to assign to any particular client. If they deem that the risk of defaulting is high, you’ll know in advance and can dictate terms accordingly.
Using credit insurance and factoring companies doesn’t eliminate risk of non-payments, but carefully managed, it reduces this risk to negligible, as you have an agreement, in advance, that the large part of all of your invoices will be covered by a third party.
It’s often said that cashflow problems are the bane of new businesses. Even very small contract recruitment agencies will see holes of many hundreds of thousands of pounds/euros/dollars a few months into operations. That’s why, for me at least, sourcing a good factoring company as a key supplier is a no-brainer.
Further reading:
- Factoring on Wikipedia
- Debt Factoring and Invoice Discounting on Business Link
