The Outsauce view The five step guide to... Financing Recruitment Business Growth
Introduction Despite the economy, there will always be opportunities for promising businesses. Funding may be harder to come by, but recruiters are in a great position to take advantage of several sources to finance their growth. This Buyers Guide will set out some of the considerations you should make when expanding or seeking to expand your recruitment business, including a breakdown of the various options available. We ll cover the all-important planning phase, in which goals and strategies should be clarified before any funding decisions are made. You ll find a broad list of considerations for now and the future designed to get you thinking about the bigger picture and exactly where finance fits in. Each of the main sources of funding will be analysed, with their respective pros and cons. Payroll options like factoring and invoice finance will receive special attention, appropriate to their significance for recruiters. When the options have been discussed, we ll talk through the process of choosing your provider including the services and capabilities to look out for and an argument in favour of specialists. So dig in, and remember if you need to talk through any of the topics raised with an expert just get in touch. 0330 100 8686 ask@outsauce.net Buyers guide. Introduction 01
The five steps to Financing Recruitment Business Growth Step 1: Preparation pg 03 Step 3: Understanding factoring and invoice discounting pg 06??? Step 4: Who should you choose? pg 07 Step 2: Choosing your funding options pg 04 Step 5: Taking it to the next level pg 08
Step 1: Preparation Before you start Is your business plan up to date? Ideally, all your business activities should align with your long-term goals. The day-to-day realities of running a business may sometimes interfere with your plans, but funding decisions are best made with forethought. In order to make a funding choice that fits with your strategy, you need to be sure what that strategy is. And many of your lenders will be interested, too! Consider where you want to take your business: Are you seeking to grow? If so, how quickly? Do you want to take on more temps/flexible workers? Do you need to invest in infrastructure? Is an acquisition on the cards? Be clear on what you are trying to do, then ask yourself: What will it take to achieve your goals? Identify significant constraints or dependencies Give consideration to your current circumstances before casting an eye to the future. What obligations do you have to existing staff, landlords... lenders? Is your current income derived from a wide client base, or do you rely on a few big payers? Can you depend upon your existing clients for continuing business and payment? Or are you chasing debtors? Research overheads/future costs When you ve assessed your present situation, apply the same thinking to your projections. Expansion typically requires a lot of energy and of course, some funding, before the cash comes in. For example, taking on more staff will put a significant drain on your operational expenditure that may not be immediately matched by income. This is easily rationalised if hiring to meet a surge in demand, but requires well-informed justification if speculating to generate new business. Put yourself in a client frame of mind and consider hiring on fixed term contracts! Of course, there are ways to quickly scale your financing requirements up and down with your flexible workers which we ll cover later [see page 06 Step 3: Understanding factoring and invoice discounting]. Be pragmatic, don t underestimate We re firm believers that the glass is half full. But it s better to be pragmatically pessimistic with your projections, especially if you have other shareholders. Seek efficiencies but don t economise on your ability to do the job properly. (If you re just starting out, raising six months upfront costs is a good rule of thumb. And remember you need to pay yourself a living wage.) Cash flow considerations Do you have enough working capital to run your agency now and during a period of growth? How strong are your existing relationships with your clients and are they good payers? If you re just starting up, do you have any warm prospects that could be quickly converted to fee paying customers? Factor in delays around placements and payments Don t forget... Tax; Employers NI Employee NI Income tax Employee benefits; Holiday pay Maternity pay Buyers guide. Preparation 03
Step 2: Choosing your funding options With the groundwork done, now it s time to choose where to get your funding from. We ve broken down the various options available to recruiters, including the pros and cons for each. Use the list below for a quick-reference and recap and remember that the specifics will vary depending on provider. Types of funding: Savings Convenient and instant but likely to be insufficient on their own. Limit your risk using other sources as well Getting a mortgage (or a second mortgage) Always approach with caution, but a ready source of capital nevertheless. Selling possessions or assets You could always buy them back again Self-finance balance risk with responsibility Gives you more control, but Exposes you to greater personal risk Mortgage/re-mortgage puts pressure on your household Likely you will need to generate funding from other sources Overdrafts Not great for lump sums, but useful to aid with cash-flow. Bank loans An obvious choice but not necessarily ideal for your day-to-day business requirements there are more specialised forms of finance that are typically better suited to recruiters. Banks will need to be confident that your agency is a sound business proposition hence the importance of an up-to-date business plan. The financial crash has made it harder to secure finance from banks, but if you can meet their conditions they can still be a useful source of cash mostly for capital expenditure or moderate operational costs. The total sum is unlikely to be sufficient to pay contractors each week in advance of payment from the client. Remember: paying interest on inflexible loans can eat away at finances. And be wary of personal guarantees Buyers guide. Choosing your funding options 04
Unsecured loan Relatively easy to attain, as opposed to bank loans which require personal guarantees, but difficult to get a large sum. Definitely worth investigating and adding into the mix. Commercial lenders such as insurance companies and building societies These lenders can offer lower interest rates and are less restrictive, but are subject to fewer regulations than banks and you might have to provide some security. Credit cards Depending on your credit rating, these can provide easily accessible short-term cash. Great for smaller purchases or limited operational expenditure (think phone bills) but the interest will mount quickly, especially if you stack different cards. Research the market for the best deals many providers will provide interest free or reduced interest arrangements for limited periods. Personal guarantee A personal guarantee is a common way to secure a loan for start-up businesses without a credit record. A director, who is also a shareholder of the company, agrees to be liable for a certain amount plus interest, including any costs and expenses. Personal guarantees are quite easy to secure but are difficult to get out of and should not be entered into lightly. On the plus side, they allow new companies to borrow money relatively easily and are only enforced if payments stop. But should the company default on its debt, the lender may seek the money from the guarantor. If he/she is unable to pay, the lender may seek a bankruptcy order. Explore all your options before committing to a personal guarantee and always get your liability in writing. Provided you don t rely on them exclusively, credit cards are a convenient tool in your arsenal. Equity split with a partner Half the cost, half the rewards equity splits share both the risk and the spoils. Depending on how much effort and experience your partner can bring to the table, this could help your business develop even further, as well as fund it. Borrowing privately Family and friends may be willing to stump up out of love, sound business sense (or misguided devotion!) This brings personal as well as financial ramifications, so you are the best judge of what you re getting in to. Private investors like venture capitalists can provide significant backing, but they will want to see a return. Selling a share in your business could seem like a good idea until that share becomes more valuable and you wish you only had a single sum to pay off. Corporate finance Corporate finance can be a useful tool to assist with short-term funding and investing in growth. Corporate finance providers can also prove invaluable when it comes to acquisitions and selling your company where it s really best to seek specialist advice to manage the legal nuances and maximise your return. Outsauce Corporate Finance Sometimes it takes more than hard work to grow a business. But we don t believe everything has to be difficult. Corporate finance advice can unlock the potential of your recruitment agency. We provide the key. We offer a range of corporate financing options to help you achieve your goals; from short-term funding and investing in growth, to supporting acquisitions and assistance with selling your company. If you have the confidence to take it to the next level, it s only right that you should have the same confidence in your adviser. As specialist corporate financiers in the recruitment sector we have the experience and expertise to understand your financial needs and to help you maximise the return from the investment in your company. Call or email us to find out more. All enquiries will be treated with the utmost confidence. 0330 100 8686 corporatefinance@outsauce.net Buyers guide. Choosing your funding options 05
Step 3: Understanding factoring and invoice discounting A flexible choice for growing recruiters If you are an ambitious start-up or growing company, factoring and invoice finance help you to expand with confidence maintaining a healthy cash flow by unlocking money tied up in your invoices. These solutions are ideal for recruitment agencies that often have to pay their flexible workers upfront in advance of receiving money from the client.??? So, how do they work? In simple terms, factoring and other forms of invoice finance allow recruitment agencies to get paid earlier. In factoring, a recruitment agency can sell its invoices to a factoring company at a discount, before the end-customer has paid. This means that for a relatively modest fee, agencies can get a reliable cash flow and do not have to worry about chasing invoices; that administration is taken care of by the factoring company. Invoice discounting is effectively borrowing against unpaid invoices. The end results are similar to factoring although invoice discounting is closer to pure lending as, unlike a factoring facility, you retain responsibility for chasing payment and managing the sales ledger. Factoring and invoice discounting have the facility to grow automatically with your sales, providing a greater degree of flexibility than many other forms of finance. The converse applies to bank loans and overdrafts, which are usually based on accounting information and are always in arrears compared with your company s sales ledger. For many temp agencies, factoring and other forms of invoice financing are essential tools. The key is to choose carefully. Why factoring/invoice financing are great for temp agencies: Reliable cash flow in exchange for modest fee Don t have to worry about chasing invoices A good financing provider will cover up to 100% of your temp payroll Could also cover your perm billing and Invoice your clients on your behalf, meaning that you get your money before your client pays The facility grows automatically with your sales, unlike bank loans and overdrafts Buyers guide. Understanding factoring and invoice discounting 06
Step 4: Who should you choose? Benefits of applying for funding through a reputable financing company There are 1,000s of financing companies competing for your business, but not all can claim to provide the same quality of service. You should take care to avoid exposure to unnecessary risk, potentially unscrupulous activity or unfavourable terms. That is why it is important to choose a reputable financing company with a proven track record. A respected provider will give you peace of mind, while offering a number of useful services, such as: Applying for protection against bad debt on your behalf Ensuring rigorous credit control Chasing clients for payment of your invoices Making monthly returns required under the bad debt protection policy Paying your employees PAYE/NIC direct to HMRC All of this means greater speed and convenience, and the maintenance of a healthy cash flow. Why choose a specialist? In a crowded market, your challenge is to find a provider that really understands the industry and has a proven ability to help businesses like yours manage the unique and varied challenges of the recruitment sector. A true specialist is a partner. They will understand your requirements and work with you wherever you are in your business life cycle from start-up and beyond. Ideally, they will have first-hand experience of your challenges. Specialists understand the fickle nature of the recruitment industry and are less wary of financing phoenix businesses they are sympathetic to the pressures on agencies so you can approach with confidence the next time round. Generalists have their place, but they are not ideal for recruitment agencies. Many will lack the insight or inclination to handle the nuances of collecting temporary or permanent placement invoices. Navigating the compliance challenge The government is stepping up its pressure on unscrupulous operators, so now more than ever it s essential to ensure compliance with the law in every area of your business. Specialists should be well-versed in the shifting legal landscape and be able to help you interpret the sometimes confusing guidance from HMRC and stay above board. Buyers guide. Who should you choose? 07
Step 5: Taking it to the next level Outsourcing gives you the confidence to grow So, you re expanding or seeking to expand your business? An exciting prospect, but maybe also quite daunting perhaps you re concerned that you don t have the necessary resources to achieve growth and manage your business effectively post-transition? You may be concerned that placing more flexible workers or hiring more staff will increase pressure on payroll and finances or whether the expected new business will come on line and pay in time to meet your existing and future obligations. Two key questions to pose yourself pre-growth: Could you fund the increase in staff payment? Can your financing facility scale up quickly in line with your sales? There is one potential answer to both of these questions... Outsourcing to a specialist provider can take away many of the headaches of business growth. Removes the administrative burden all invoice chasing/payments are handled by your provider Can manage your payment of Tax and NI contributions, as well as employee benefits freeing you up to focus on day-to-day operations Gives you confidence on compliance expert providers can steer you through the potential pitfalls of legislation Can assist you with securing funding flexible finance, with informed guidance; on-tap cash flow. And allows you to focus on business development Don t forget the most important source of funding: your clients! Securing finance is a very useful tool to support your activities, but you re not in business just to borrow. One of the biggest advantages of outsourcing your finance and admin is that it allows you to concentrate on your speciality running a recruitment agency and selling your services. When your back office-function is managed by a trusted provider, you can dedicate more time to business development and if you have chosen wisely, your provider will be able to scale up to accommodate the new clients you bring in. Win win, basically. Did you know? With Outsauce, funding can be combined with a full suite of financing services including credit control and sales ledger administration. With up to 100% funding for temporary invoices, all your temps are paid on time and in full. No need to worry about a shortfall. No need to dip into your overdraft. We also provide financing for perm invoices as part of a combined offering or on a stand-alone basis. Want to know more? 0330 100 8686 ask@outsauce.net Buyers guide. Taking it to the next level 08
Funding the acquisition of another business There s growing organically and then there s bringing a ready-made business on-board. Lots of arguments for this tactic for starters, you may be narrowing the competition. Acquiring another business can help you expand your coverage quickly and break into new sectors. Then of course, the target business should already have a lot of infrastructure and a ready-made client roster in place, so you won t be setting off from a standing start. One drawback is that you will typically need to invest a large amount up front. This will include budgeting for professional fees solicitors, accountants and surveyors will all need to be involved in due diligence etc. Fortunately, obtaining finance might be easier if the company has a proven track record. In addition, provided a whitewash certificate is provided by an accountant, the target company s invoices can be used to release the funds for acquisition (unless it already factors or discounts those debts.) Talk to your financing provider to manage the transition smoothly you need to make sure contractors and employees get paid without interruption. Things to consider before you buy: Why is the owner selling? What is the company s reputation and revenue? Value the assets and the debts What existing contracts will need to be honoured/renegotiated? Is there any outstanding litigation on the company? Will you need to inject extra money to bring the business up to speed? Talk to existing customers (but exercise discretion) Assess the quality of employees have you had any interactions with them before? Consider cash flow set aside a few months of working capital to assist with any extra cost Remember rebranding the new company will add to the bill. Time to bring it in-house? When your business gets big enough, it may be advantageous for you to bring your financial support functions in-house. Factoring is a great way to outsource admin and finance together, but when you become a certain size, it may be more cost effective for you to employ someone (or a team) to manage back-office processes. However, if you are employing large numbers of temps, it may still be unfeasible to pay them in advance of receiving payment from end-clients. This is why invoice discounting remains a very attractive choice to larger agencies. A good invoice discounting service will cover your financial obligations to your flexible workers, while allowing you to take care of the admin, including employee benefits and entitlements, plus Tax and NI. Banks are simply unable to offer the required level of flexibility and amount of finance, making invoice discounting an invaluable service to recruiters. Buyers guide. Taking it to the next level 09
Conclusion We hope this has been a useful introduction to the various options available to you and your growing agency. Hopefully you should now have a better understanding of the opportunities presented by different types of finance, and a clearer idea of how you can use them to pursue your ambitions. All that remains is to finalise your business plan and scour the market; well prepared to identify the best, most reliable deals. We ll leave you with a checklist to ensure you get the most out of your chosen provider: Choosing carefully Questions to ask your financing provider Can they adapt to your changing needs? Do they provide back office support in addition to funding? As your business grows, how well placed are they to grow with you? Can their services scale from pay and bill right through to invoice discounting as you bring some of your financial support functions in house? Do they have a corporate finance service to help manage acquisitions and sell your company? What is their experience in the recruitment sector? Do they understand the cash-flow characteristics of employment businesses? Can they scale up and down with you, according to the changes and seasonality of business flowing through your agency? Do they understand the compliance issues within the recruitment industry that can impact on your finances? Of course, the world of finance can be complex so it s always best to consult with experts before making a big decision. If you d like to discuss any finance related question or the back-office requirements of running and growing a recruitment agency please contact our team. Our financial experts are welltrained and collectively have many years direct experience in the recruitment industry. We know the challenges and opportunities first hand and the best way to help you achieve your goals. 0330 100 8686 ask@outsauce.net Buyers guide. Taking it to the next level 10