How Invoice Finance Works for Recruitment Agencies
Invoice finance is widely used by recruitment agencies that place contractors or temporary staff. It provides the cash flow needed to pay contractors before the client settles the invoice. While the process can initially seem complex, it follows a clear and structured workflow. Here are seven steps that explain how invoice finance works for recruitment agencies.
1. Credit check the client
The first step is to assess the client's creditworthiness. Recruitment agencies carry out a credit check unless the client is in the public sector, where this is not required. If the agency uses credit protection through its invoice finance provider, the provider will complete the check instead. Alternatively, external credit insurance may be used. The client’s credit rating often determines the level of funding available against their invoices.
2. Raise the invoice based on an approved timesheet
Once a contractor has worked and submitted an approved timesheet, the agency raises an invoice to the client. This invoice is recorded in the accounting system and sent to the client for payment, provided sufficient credit and funding limits are in place.
3. Upload the invoice to the finance provider
After issuing the invoice, the agency submits it to the invoice finance provider. This can be done through direct integration with accounting software or via a manual upload process, depending on the provider’s system.
4. Draw down funds
Once the invoice is received and processed, the provider confirms the available funding, typically 80–90% of the invoice value. The agency can then request a drawdown, which transfers funds to its business bank account.
5. Pay the contractor
With funds received, the agency pays the contractor in advance of the client’s payment. If the full funding amount is drawn, the agency may also use the surplus cash for other business costs, such as suppliers, salaries, or dividends.
6. Chase client payment
The client then pays the invoice directly to the invoice finance provider (in factoring arrangements) or to the agency (in invoice discounting or CHOCS facilities). Responsibility for credit control may sit with the provider or the agency, depending on the agreement.
7. Release remaining funds
When the client pays the invoice, the remaining balance, typically 10–20%, becomes available for the agency to withdraw.
One Response