Forecasts by the Recruitment & Employment Confederation (REC) for the value of the UK recruitment sector in 2011-12 are, pessimistically, £24.7bn and optimistically, £26.4bn. For 2014-15, the REC’s pessimistic forecast is £28bn and its optimistic one £33bn.
Growth may not be stellar but those that lend recruitment agencies money for expansion say there are plenty of agencies seeking funding.
Sharon Wiltshire, managing director, Bibby Financial Services, which provides invoice-backed finance to recruitment agencies, says the market “is reasonably buoyant”. Gary Laurence, a former recruitment agency boss who founded investment specialist Krypton Capital, says “demand for investment outside traditional banking has risen”.
Debbie Bell, ABN Amro commercial sales director for North-West England and the Midlands, who deals with recruitment agency financing, says: “We’re seeing a very buoyant level of activity. It’s down to the uncertain economy. Employers would rather hire interims and contract and temp staff than perms. We’re also seeing employees who are top performers in agencies who want to set up themselves. I’d say inquiries from agencies [about funding] are up about a third this year on last.”
According to Barclays, which typically deals with medium to large recruitment agencies, diversification is the name of the expansion game with firms looking to expand into growing markets overseas, such as the BRIC (Brazil, Russia, India, China) quartet, and the Middle East and Germany. In terms of sectors, it says oil & gas, engineering and healthcare are attracting interest from agencies looking to diversify and grow.
David Roust, head of the recruitment industry team at Barclays, says: “Some larger clients have opened branches overseas while some smaller ones that are looking to expand often do so with clients they know. They’ll move into other areas following the client – by supplying new types of staff. There’s not a lot of acquisition – it’s evolution not revolution.”
However agencies choose to pursue growth, they need funding. They have various options: funding from cash reserves; using working capital facilities; arranging a straight bank loan; using an overdraft facility, taking a syndicated loan; attracting investors; issuing shares; or most commonly, making use of invoice or debt financing.
The recruitment agency business model is fairly simple and its assets are basically its debtor book and its staff. According to Barclays, this means that funding for expansion usually combines equity investment by the owners and invoice discounting options.
This involves specialist lenders taking an agency’s invoice or debtor book and lending against it. So as the agency’s business grows, so does the value of the invoices it bills and therefore it can borrow more against its debt book.
Figures from the Asset Based Finance Association (ABFA) show the turnover of companies using invoice financing rose 6% in the first quarter of 2012 to reach £59.2bn. ABFA says invoice funding available in the quarter was £22.9bn with £15.4bn taken up, leaving £7.5bn untouched.
There were 41,989 clients taking invoice-backed financing from ABFA members, including 493 new clients added in Q1 2012.
Wiltshire deals with hundreds of agencies that have taken this route. “How much do we lend? In some cases we pay up to 100% of the value of invoices. It’s done on a case-by-case business and usually we pay about 90%. This can range from £50,000 to £25m a year.”
It costs. Wiltshire says Bibby charges a fee for running an agency’s invoice ledger, while its interest charges are about 2% above the LIBOR rate.
ABN Amro offers a similar service. Bell says: “We fund a percentage of the debtors’ books from 80% to 90% of its value. We also offer a credit control service. We take on a debtor book and charge an admin fee for running the book. The fee depends on the volume of activity. Funding for invoice financing is available almost immediately on the raising of invoices.
“The discount rate margin is base rate plus 2-3%. That’s charged on the balance the client owes us and is calculated on a daily basis. There is also a service charge for running the invoice finance facility. The fee depends on the risk profile of the debtor book.”
Another way to fund expansion is by attracting funding from external investors. Larger agencies can do this by share issues or drawing on cash reserves. Another way is to approach investors who specialise in the recruitment agency sector, such as Krypton Capital founder Laurence. Krypton provides working capital and arranges bank loans and back office support.
Its investment typically takes the form of loan notes. These are investment instruments, says Laurence, which are “a little bit like an IOU”. Loan interest is payable at a fixed rate per annum that ranges from 8% to 12% per year.
This seems high but Laurence says bank lending has “many hidden additional fees such as their facility fee, monitoring fees, and... legal and penal rate fees if covenants are breached”.
Established businesses looking for investment finance should, says Laurence, be able to present a strong business case, have strong financial controls, and reliable and detailed management accounts. They must also show cash flow analyses that deal with ‘what if’ scenarios, such as what will happen if revenues are far less than forecast or debtor repayment terms are extended.
He advises recruitment agency bosses looking to expand to steer clear of short-term bridging funding and giving personal guarantees, and to get references on potential investors to see what they may do if the business does not perform in line with expectations.
That personal touch
Recruitment agency owners seeking funding for growth will find that lenders will want to verify their bona fides and will want to see detailed business plans that include well-founded growth projections.
“We make judgements on the business plan and the principles behind the business,” says Bibby’s Sharon Wiltshire. “They must also have a good spread of customers and a good, viable invoicing system. We will check out their customers to see if they are credit worthy.”
Personal qualities are also important. Laurence says he looks for “integrity, honesty, and business acumen. Owners must present well, be eloquent and fairly charismatic. Leadership quality is essential. It’s a deal breaker”.
Case study: Clear Edge
Clear Edge is a City of London agency, which specialises in sourcing and placing technology and finance experts, and started trading in January 2012, following a six-figure investment. It now has 12 employees and hopes to open its first international office soon. Managing director Rob Hamilton says: “We are trading significantly ahead of budget. Some 70% of our business is international with placements already made in Europe, Latin America and Asia-Pacific.”
Clear Edge has approached Krypton Capital for a “seven figure” investment to help fund its “ambitious” growth plans. These include at least one international office and 50 plus consultants.
Hamilton says the funding he hopes to get from Krypton means “we can achieve our aims in the shortest time frame possible. Beyond this we are committed to creating a company with a realisable capital value”.
He says the investment needed to start Clear Edge was not available from the banks.