How To Finance A Recruitment Agency
How To Learn What You Need To Know
It is very common for recruitment consultants to start out working for large agencies, with a view to starting their own business at some point.
By working for a large recruiter a consultant gets to learn how the industry works but more importantly builds up a portfolio, or list of clients and relationships with a network of potential candidates.
If you want to run your own business, this can be a basis on which to learn what you need to know, in order to be able to start your own agency.
Outsourcing Your Back Office
As this career path is so common, there are specialist recruitment outsourcers that can undertake all the back office processing for you e.g. accounting and payroll management, They will literally deal with everything but the placement of staff with clients.
Financing Your Recruitment Agency
If you are thinking of starting a new recruitment agency, financing your new venture may be one of your concerns. Below we have set out our research about the types of finance that recruitment agencies tend to use. We found that common sources of finance were as follows:
- 45% - Self funded
- 33% - Combination of overdraft and bank loan
- 17% - Invoice Finance
- 3% - Family money
- 2% - Combination of overdraft and family money
The Benefits and Drawbacks Of Different Sources Of Funding
These are the benefits and drawbacks of each of those approaches:
Self Funding
The majority told us that they had used their own money to fund their startup. The benefit of this is that it is of course the cheapest way - no interest charges or other fees to worry about. The disadvantage can be constricting growth due to a lack of funding, You are limited to what you have in the bank. If a big contract turns up you could have to turn it away due to a lack of funding. Recruiters can be amongst the fastest-growing businesses, so you can quickly outstrip the money you have available if your business really takes off.
Self-funding also eats away at your personal resources, rather than making your business stand on its own feet.
Overdraft or Bank Loans
These are widely used and understood as simple by businesses. With an overdraft, you have a set amount that you can borrow via your current account. They get charged for the time that you use those funds and there can be other related charges e.g. for reviews etc. It's normally repayable "on demand" which means that it can remain outstanding until it is called in by your bank. There is always the risk that your bank could call in your overdraft if they are unhappy with the progress of your business.
In the case of a bank loan, again it's a fixed sum, unlike an overdraft which is repaid over an agreed period, known as the term of the loan. The repayments include an additional interest margin over and above the amount that you borrow.
These types of finance can be difficult to get these days or the amount of finance that you can access, using these methods, can be limited if you are a new business, without any tangible security to offer e.g. property. This can be an issue for new startups that want to grow quickly.
Invoice Finance
1 in 6 recruiters use this type of recruitment invoice finance, 20 times more than our estimates of the national average.
There is of course a cost to using invoice finance, as with any external source of funding. Some people are worried that invoice finance will be expensive but we found a 165% swing in pricing between the most expensive and the cheapest, so you need to know who can quote competitive rates. There are also a myriad of options such as selective, where you pick and choose invoices to get funding against, and factoring where you get a credit control service included in the price.
The finance is provided against your unpaid sale invoices, as you raise them, so it grows as you increase your turnover. Your invoices are the security, so you don't need to have any property or track record, to offer as security. It can work for temporary placements and permanent placements, or a mixture of both.
Over half of the recruiters are concerned about late payments by customers, so this type of funding has the added benefit of tackling that issue i.e. you get the majority of the invoice value upfront from the financier. Also, a credit control function, to collect your invoices, can be provided, as an optional extra. Unfortunately, it is not a well-known option, and some aspects are misunderstood. We found that a quarter of recruiters hadn't even considered this option when thinking about how to fund their businesses.
Family Money
The pros and cons are probably very similar to using your own money, unless, of course, your family are going to charge you to use the money. It has the added drawback of not being your own money, so if anything happens to your business you could end up owing your family money, which could prove uncomfortable.
Help With Finance
For a confidential discussion about the options, with an independent adviser, please call Sean on 03330 113622 or request a callback.
