How to finance your new recruitment business

Guest blog from Simplicity.

According to figures released by Companies House, over 6,000 recruitment businesses were registered last year. Even though it is common knowledge that the recruitment industry is enjoying a period of growth, this is proof that the industry is booming.

However, just because confidence is strong, it doesn’t mean all recruiters should leap at the chance to go it alone and leave the relative safety of working for someone else. Being a great recruiter is one thing, but starting and running a successful recruitment business is a different matter.

How your recruitment business will perform at the beginning

Recent reports tell us that 1 in 5 (20%) of all new businesses in the UK fail within the first year. Furthermore, within three years, that figure rises to 60%. Why? Because the amount of money a start-up business requires is underestimated. Without sufficient funding, recruitment owners will quickly struggle to invest and grow their business and pay their workers and themselves. At best, business growth would be heavily restricted, and at worst, their business would go bust.

A good method to go by when starting is to assume your business might not receive money for up to 6 months. This may sound over the top; however, placing your first candidate often takes over a month. Furthermore, if you are working in permanent recruitment, they will often have to serve a notice period of up to three months in senior positions. And, before you know it, you’ve left it five months to send your invoice, and payment may not arrive until month six. This all adds up.

So, in the early stages, what are your financial options?

Bank loans are believed to be the primary income source for many recruitment business owners. Still, in recent times, many banks will be cautious when providing funds to a start-up, especially if they have no backup records. Even if you can acquire one, it is a short-term loan and, unfortunately, is only a temporary solution.

For many recruiters, factoring has long been the preferred method of funding. While there are certain advantages to factoring, there are several disadvantages too.

Factoring by default imposes concentration limits – the maximum amount the provider will cover for a single client. So, if you plan to work with a small number of large clients, these limits could restrict you from gaining access to your profits.

Also, the longer it takes your client to pay, the more expensive your factoring facility becomes with interest continually accruing over time for late payments. Not only that, this will also reduce the total amount you can borrow. So you incur additional costs, and both your profit and access to available funds will be significantly reduced too.

Recruitment specific finance

One great solution is to partner with a high-quality recruitment finance and back-office provider to put your business in a secure financial position.

Compared to other options, alternative finance providers are accommodating to the ever-changing needs of recruitment businesses. This can be critical, especially if you work with clients who need to scale up and down operationally within short timeframes.

Specialist recruitment funders can provide you with access to the finance you need, when you need it, without the limitations and caps associated with factoring. So, even if your clients take 60 days or more to pay, the money can be in your account within a day or two of raising an invoice, thereby guaranteeing access to your profit margins and improving cash flow.

There are also alternative finance providers who provide comprehensive back-office support as part of their overall recruitment solution. This includes paying your workers, invoicing clients, and assuming responsibility for chasing debt while focusing your time developing your business.

The important part about using a specialist financier is that they understand the recruitment market. Also, they can be flexible to support your business from start-up to growth.

Simplicity is here to help

It is a challenging time when setting up a new recruitment business but with the support of the right provider, your challenges significantly decrease. Simplicity can help you start and grow a recruitment business with the Getting Started Guide. Download now to access valuable hints and tips.

Simplicity has provided market-leading financial solutions to thousands of recruitment businesses. We only work in the recruitment industry, which means we understand and overcome your challenges. So, whether you are looking for a temporary or permanent solution, we have the funding, team and technology to get you started

Get in touch today on 01594 888518 to find out more about our services, or download a copy of our brochure here

Disclaimer:

This blog is meant as a guide only and is the opinion of the Simplicity team following many years of working with recruitment businesses. However, this does not constitute professional advice or direction, and the final decisions made in relation to any new business are the responsibility of the business owner and/or director. Simplicity does not accept responsibility for any outcome based on the opinions given in this document.

REC is an Introducer Appointed Representative of Keen Thinking trading as Simplicity. Registered in England number 04012805. Registered Office: The Aspen Building, Vantage Point Business Village, Mitcheldean, Gloucestershire, GL17 0DD

This is a guest blog contribution for the REC website. The views expressed by guest writers reflect the individual's personal opinions.