One of the most stressful aspects of running a contracting business is ensuring your working capital requirements are adequate and your cash-flow is under control.
This can be a consequence of having to make payments to contractors on a weekly basis but having your debtors on 30 plus day terms. As contracting businesses grow, it is common for owners to take out debtor finance in order to manage their weekly working capital requirements. Generally, it involves the provision of finance from a banking institution that is secured by the debtor book.
How it works
Invoices that have been sent to debtors are also sent to the bank;
Subject to certain restrictions, the bank will immediately make funds available equating to a defined percentage of the value of the approved invoices. Generally, this can be 75% to 85% of the value of the invoice;
The debtor will then make payment of the invoice to a dedicated bank account in the recruitment agency’s name. At that time, the remaining percentage (ie 15% to 25%) of the invoice value will be paid by the bank to the recruitment agency.
Certain facilities restrict what invoices will be accepted for finance. This may include limiting the finance available for invoices relating to permanent placements or specific debtors.