Choosing the right financial infrastructure is one of the most critical decisions a recruitment agency owner will make.
The method you choose to fund your placements impacts everything from your daily admin workload to your long-term scalability and client relationships.
In the recruitment sector, three primary models dominate the landscape:
Invoice Factoring vs Invoice Discounting vs Specialist Recruitment Finance
Here’s a look at how they compare to help you determine which is the right fit for your agency’s current stage and future goals.
Invoice Factoring: The Full-Service Option
A popular choice for startups and small-to-medium agencies that want to combine recruitment funding with admin support.
- How it works: You ‘sell’ your invoices to a factoring company. They provide an advance (typically 80-90% of the invoice value) and then take over the management of your sales ledger.
- Credit Control: The factor is responsible for chasing your clients for payment. This is a disclosed service, meaning your clients will know you are using a finance provider.
- The Pros: It reduces the need for internal credit control staff, saving you overhead costs. It also often includes bad debt protection.
- The Cons: Some agencies worry about the stigma of a third party contacting their clients. You also might lose a degree of control over your customer relationships during the collections process.
Invoice Discounting: The Confidential Choice
Generally preferred by larger, more established agencies, that have the internal resources to manage their own finances but need to unlock the cash tied up in their invoices.
- How it works: Similar to factoring, the provider advances a percentage of your invoice value. However, you maintain control over your sales ledger.
- Credit Control: Your agency continues to chase payments and manage client relationships. The arrangement is confidential, so your clients are usually unaware that a finance provider is involved.
- The Pros: You maintain total control over your brand and client interactions. It is often cheaper than factoring because the provider isn’t doing the administrative work for you.
- The Cons: Most providers have higher entry requirements, such as a minimum turnover or a proven track record. You also keep the admin in house, so you need to employ your own credit control and accounts team.
100% Funding: The Specialist Recruitment Model
Specialist recruitment finance, or 100% funding, is a model designed specifically for the unique payment cycle of the recruitment industry.
- How it works: Unlike traditional factoring or discounting (which usually leave 10–20% of the invoice value ‘locked’ until the client pays) this model releases the full profit margin immediately (minus a service fee).
- Integrated Support: These facilities usually bundle funding with back office services like payroll processing, VAT management and credit control.
- The Pros: It offers the highest level of liquidity, allowing agencies to reinvest profit instantly. It is highly scalable and often requires no personal guarantees or debentures, as the risk is secured against the invoices themselves.
- The Cons: Because it is a comprehensive service, it may involve a higher service fee than simple invoice discounting, and it requires a deeper level of integration with the provider’s platform.
Which Should You Choose?
The right choice depends entirely on your agency’s structure and your personal choice:
- Choose Invoice Discounting if you have a strong, in-house finance team, a high turnover, and you prioritise keeping your funding arrangement confidential from your clients.
- Choose Invoice Factoring if you’re a smaller agency that doesn’t want to hire a credit controller yet and is comfortable with a third party managing your collections.
- Choose 100% Funding if you’re focused on rapid growth, particularly in the temporary or contract sector. It is the best option for owners who want to outsource the headache of payroll and compliance entirely while maximising the cash available to reinvest in the business.
Before signing any agreement, look beyond the interest rate. Consider the hidden costs of internal staff, the impact of personal guarantees, and the flexibility of the contract.
If you want an informal chat about how our specialist recruitment funding works, get in touch.
