What You MUST Know Before Investing in a Temp Facility with a Funder

When setting up a temporary recruitment business, choosing the right funding facility is crucial for success. But many agencies dive into agreements without fully understanding the potential costs and risks involved. Here's what you need to know before making a decision that could impact your business long-term.

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1. Funding Coverage: Beware of the Shortfall

If your current funder covers 100% of your invoices, be cautious when switching to a more advanced funding facility. Many work on 90% or lower. This means if you have ￡1 million outstanding with your old funder, a new funder covering 90% will only provide ￡900k, leaving you with a ￡100k shortfall. You’ll need to pay that difference upon transfer, which can be financially crippling if not planned for.

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2. Renewal Fees: A Negotiation Point

Funders typically charge a renewal fee, usually a small percentage of the amount borrowed. This can add up to thousands of pounds per renewal. If you're in a strong position with competing funders, use this to negotiate and ask them to waive the fee. If they want your business badly enough, they might agree.

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3. Gross vs Net Charges: Don't Pay on VAT

Many funders charge a percentage of turnover per week, but check if they’re charging on gross or net turnover. If it’s gross, you’ll be paying on the VAT as well, which means higher costs. Always clarify this in advance.

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4. Hidden Fees: Dig Deeper

Some funders charge for credit checks or other hidden costs. Ask for all potential fees upfront, so that a seemingly great offer doesn’t end up costing far more than expected.

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5. Concentration Rates: Know Your Limits

Funders often set a concentration rate, which limits how much of your turnover can come from a single client. For example, if it’s set at 70% and one client accounts for 80% of your ledger, they can withhold the extra 10%. If you have credit insurance, funders might offer a higher concentration rate, so always explore your options.

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6. Personal Guarantees: Be Cautious

Funders may ask for personal guarantees (PGs), which can have personal consequences if something goes wrong. Negotiate for a performance warranty instead, where the guarantee is based on adhering to facility rules without affecting your personal finances.

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7. Whose Turnover Is It?

Ensure the turnover goes through your UTR (Unique Tax Reference), not the funder’s. If it’s theirs, they own the business’s turnover, and you’ll only see the margin – which could be 10 times less. This is a critical point to confirm before signing any agreement.

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8. Payment Days: Avoid Disapproved Debt

Most funders have a payment window of 90 to 120 days. If a client takes longer to pay, the debt becomes disapproved, meaning the funder can withhold that amount. If you have ￡30k that hits 121 days, the funder might withhold it, leaving you short on payroll that week. Always aim for the longest payment window possible.

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9. Regular Audits: Stay Compliant

Funders will audit you at least once or twice a year. It’s essential to maintain full compliance with both client and candidate records. If they find compliance issues, they could increase your fees or even cancel your facility.

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10. Minimum Monthly Fee: Negotiate It Down

Some funders charge a minimum monthly fee, even if your usage of the facility drops below expectations. Make sure you know what this fee is and negotiate it down or aim to remove it entirely. This can become a financial burden if you’re not making the predicted revenue.

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Protect Your Business

Investing in a temp facility with a funder can be a powerful tool for growth, but it’s essential to understand the finer details of your agreement. By being aware of the potential pitfalls and negotiating key terms, you can protect your business and ensure that the facility serves you, not the other way around.