Bridging The Gap: How Invoice Finance Can Aid Your Cashflow

It’s hardly surprising that there’s such a big market for invoice finance for recruitment agencies – after all, according to one estimate, the average agency has to wait almost two months before being paid. Often, despite the greatest efforts of your credit control team, clients will drag their heels when it comes to making payments.

That’s not a situation your agency should have to accept. After all, in theory, the process of being paid for your services should be a simple one. Once you have paid your contractor for their work, you should be able to swiftly collect payment from the client with which they were placed.

So, where does it all go wrong?

Given the typical difference in payment terms between the contractor and the client, it falls to your recruitment agency to use its own funds to bridge the gap.

As a recruitment agency, you probably pay your contractors on a weekly, bi-weekly or monthly basis. Yet, as we established above, agencies often can’t depend on their clients paying them so reliably.

Why are recruitment agencies so often paid last?

The answer is simple: because businesses can treat them that way. No recruitment agency wants to hassle clients about late payments for fear of damaging their relationships with them, thereby missing out on the repeat business on which they depend.

Large businesses are especially bad at paying in a timely fashion – but much younger, smaller firms can be problematic as well. These are the businesses that often realise that it benefits their cash flow not to make payments straight away – because when such payments are delayed, they have the same effect as a short-term interest-free loan.

Where TBOS Complete can help

Late payments aren’t just inconvenient for recruitment agencies – they are an existential threat. Your agency is the middleman, caught in a cycle of having to pay your contractors and then wait for your clients to pay you.

When there are a lot of contractors on your books or you have big growth ambitions for your recruitment agency, this situation just won’t do – you will have to increase how much you are advancing.

This helps to make clear the considerable importance of invoice finance for recruitment agencies – and why so many of those agencies appreciate the invoice finance set-up that we can provide as part of our TBOS Complete package.

While we do not provide agencies with any funding ourselves as part of this model, we can help to manage your agency’s cash flow and if necessary, set up invoice finance arrangements that match your agency’s requirements.

In the process, we draw upon our relationships with many different invoice finance providers to ensure that your agency receives the best possible quotation and service.

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5 Things You Never Knew About Invoice Finance

The fact that contract placements depend on the candidate being paid by the agency before the client makes payment means there is a strong market for Funding For Recruitment Agencies.
However, if your own organisation has previously considered invoice finance only to dismiss it on the basis of certain misconceptions, it’s worth bearing in mind some of these often overlooked facts about invoice finance.

1 It’s widely used by recruitment agencies

Research indicates that more than a sixth of recruiters are using some form of finance against their sales invoices, which equates to 20 times the national average of businesses across the sectors. With companies like TBOS also on hand to assist your business with its invoice finance set up, it’s now a very much mainstream source of funding for recruitment agencies.

2 You don’t necessarily need to give personal guarantees

While invoice finance providers often ask for personal guarantees, depending on the circumstances, they may limit the value of them or simply accept a fraud warranty. The latter means that you will only be liable in the event of committing a fraud.

3 It’s more affordable than you might think

Even the expense of funding against all of your invoices for a year can be as low as £2,000 or so, or you could always just select and pay for whatever individual invoices you would like to have funded. There doesn’t necessarily need to be any obligation to fund further invoices.

4 Even a bad credit history need not be a barrier One of the best things about invoice finance for recruitment agencies is that it is the strength of the firm’s sales debts that determine eligibility. That means a poor credit history is less important to an invoice finance provider than your agency raising simple, straightforward credit invoices to customers, provided there is some guarantee for payment such as a signed timesheet.

Invoice finance specialists tend to look favourably upon recruitment agencies, given that they usually produce good quality receivables. Not only are the underlying transactions simple, but evidence is also provided by a clear audit trail, such as signed timesheets.

5 Both big and small agencies can use it While you may have imagined invoice finance to be a form of funding for recruitment agencies that have been around for a while and reached a certain size, there’s no minimum size that your business needs to be if you wish to take advantage of it now.

Given that some invoice finance providers give you the option to raise finance against invoices valued at just a few hundred pounds, you might wish to try it out now – not least when you also consider the great numbers of recruitment agencies that have used it to aid their growth.

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Reduce Costs, Plan Your Estate and More With a Captive Insurance

Specifically, captive insurance can help your business clients potentially greatly lower their insurance costs, have more control in managing their insurance, and obtain coverage that might otherwise be unavailable or not affordable. Some forms of captive insurance allow an insured or its assign to maintain an ownership interest in the underlying insurance company. As with any successful business, an owner of a captive can work with his or her advisers to best manage their insurance company. Another potential benefit is that of business and estate planning.
This author stresses that a captive should never be formed unless the primary reason is business purpose. Captives should never be marketed by advisers as “wealth management” or “estate planning” tools. In fact, improper marketing of an otherwise compliant captive can lead to the loss of the captive’s tax status as an insurance company, resulting in taxation and penalties of nearly one hundred percent of premiums.
Yet it is a fact that a successful captive may be useful in business and estate planning. Ownership of a captive may be facilitated by a partnership or trust which is owned, controlled by, or benefits a business owners’ descendants.
As an example, suppose that a business owner (Senior) wants to establish a captive insurance company in order to lower his insurance costs. The insurance company could be owned by a generation skipping trust currently controlled by Senior’s children. The captive’s premiums must be actually verifiable and the coverage must be wholly justifiable. The insurance sold by the captive needs to comport with all relevant statutes from both a regulatory and an IRS standpoint. If the captive’s claims are less than actually anticipated, it may have retained earnings or profits. Depending on the type of captive insurance company, the tax rate levied on underwriting profits can be as little as zero percent. Over time, the insurance company’s profits may be distributed as capital gains, dividends, or even loans to the beneficiaries of the insurance trust. The captive could even provide a funding source for future business opportunities.
The ultimate effect of a compliant and successful captive could be to transfer a portion of the pre-tax premiums from Senior’s business over to Senior’s children, grandchildren, etc., without income, gift, or estate tax. The bottom line for any accountant or wealth adviser is that captives should be looked at as a way to garner significant insurance cost savings with a possibility of secondary benefits.
Again, the author cannot overemphasize the importance that the captive must be designed to and operate as a compliant insurance company. The company must have real losses, real exposure to third party risk, and cannot be in any way an alter ego of or a savings account for the business owner.
Captives can be a tremendous tool helping businesses lower their insurance costs. This author has seen an example of businesses saving millions of dollars in a few short years by properly using captives.
Equally stunning, however, are the adverse tax consequences of an improperly marketed or managed captive. The advisory team chosen for this type work should have many years of captive insurance experience and, ideally, should be supported by a large regional or national law firm.

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Using Captive Insurance Companies for Savings

Small companies have been copying a method to control insurance costs and reduce taxes that used to be the domain of large businesses: setting up their own insurance companies to provide coverage when they think that outside insurers are charging too much.
Often, they are starting what is called a “captive insurance company” – an insurer founded to write coverage for the company, companies or founders.
Here’s how captive insurers work.
The parent business (your company) creates a captive so that it has a self-funded option for buying insurance, whereby the parent provides the reserves to back the policies. The captive then either retains that risk or pays re-insures to take it. The price for coverage is set by the parent business; reinsurance costs, if any, are a factor.
In the event of a loss, the business pays claims from its captive, or the re-insurer pays the captive.
Captives are overseen by corporate boards and, to keep costs low, are often based in places where there is favorable tax treatment and less onerous regulation – such as Bermuda and the Cayman Islands, or U.S states like Vermont and South Carolina.
Captives have become very popular risk financing tools that provide maximum flexibility to any risk financing program. And the additional possibility of adding several types of employee benefits is of further strategic value to the owners of captives.
While the employee benefit aspects have not emerged as quickly as had been predicted, there is little doubt that widespread use of captives for employee benefits is just a matter of time. While coverage’s like long term disability and term life insurance typically require Department of Labor approval, other benefit-related coverage’s such as medical stop loss can utilize a captive without the department’s approval.
Additionally, some mid-sized corporate owners also view a captive as an integral part of their asset protection and wealth accumulation plans. The opportunities offered by a captive play a critical role in the strategic planning of many corporations.
A captive insurance company would be an insurance subsidiary that is owned by its parent business (es). There are now nearly 5,000 captive insurers worldwide. Over 80 percent of Fortune 500 Companies take advantage of some sort of captive insurance company arrangement. Now small companies can also.
By sharing a large captive, participants are insured under group policies, which provide for insurance coverage that recognizes superior claims experience in the form of experience-rated refunds of premiums, and other profit-sharing options made available to the insured.
A true captive insurance arrangement is where a parent company or some companies in the same economic family (related parties), pay a subsidiary or another member of the family, established as a licensed type of insurance company, premiums that cover the parent company.
In theory, underwriting profits from the subsidiary are retained by the parent. Single-parent captives allow an organization to cover any risk they wish to fund, and generally eliminate the commission-price component from the premiums. Jurisdictions in the U.S. and in certain parts of the world have adopted a series of laws and regulations that allow small non-life companies, taxed under IRC Section 831(b), or as 831(b) companies.
Try Sharing
There are a number of significant advantages that may be obtained through sharing a large captive with other companies. The most important is that you can significantly decrease the cost of insurance through this arrangement.
The second advantage is that sharing a captive does not require any capital commitment and has very low policy fees. The policy application process is similar to that of any commercial insurance company, is relatively straightforward, and aside from an independent actuarial and underwriting review, bears no additional charges.
By sharing a captive, you only pay a pro rate fee to cover all general and administrative expenses. The cost for administration is very low per insured (historically under 60 basis points annually). By sharing a large captive, loans to its insureds (your company) can be legally made. So you can make a tax deductible contribution, and then take back money tax free. Sharing a large captive requires little or no maintenance by the insured and can be implemented in a fraction of the time required for stand alone captives.
If done correctly, sharing a large captive can yield a small company significant tax and cost savings.
If done incorrectly, the results can be disastrous.
Buyer Beware
Stand alone captives are also likely to draw IRS attention. Another advantage of sharing a captive is that IRS problems are less likely if that path is followed, and they can be entirely eliminated as even a possibility by following the technique of renting a captive, which would involve no ownership interest in the captive on the part of the insured.

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