Nurturing growth in recruitment

09-December-2009 | By Colin Cottell

Last week the EEF manufacturers’ organisation reported an easing of credit conditions for the first time in more than a year. In another development, the Royal Bank of Scotland pledged to fix overdraft rates for SMEs for 12 months on renewal.

More than a year after the Lehman Brothers collapse precipitated the credit crunch, these are encouraging signs.

But are they just isolated blips or a harbinger that when, as most economists believe, the economy finally emerges from recession next year, finance providers will truly be ready, willing and able to support the recruitment industry as it seeks to grow?

Paul Saunders, director of Lloyds’ recruitment finance division, says: “There is no doubt that banks will be really keen to support the industry in the next cycle because recruitment businesses will come out of the recession faster than other industries. They want to share in any upturn, and make sure they improve their own returns. It’s a virtuous circle, in which we all benefit.”

Saunders says that Lloyds has already seen around a 10% increase in the number of temps paid every week, from around 6,000 at the beginning of 2009 to close to 7,000 now.

According to Saunders, finance providers such as Lloyds are ideally placed to help recruiters as they begin to grow. The primary way is through providing invoice discount finance and factoring, says Saunders.

The cost will be higher interest rates to recruiters. All the banks are rebuilding their balance sheets by charging more for their finance

These bridge the gap between recruiters paying their agency workers and getting paid by clients, by providing recruiters with payments up to 90% of the value of invoices raised. This form of financial support is especially valuable during an upturn, says Saunders, as it helps to avoid recruiters going bust by running out of money.

Peter Ewen, managing director of Venture Finance, says: “This type of funding is ideal because it grows as the business grows.”
Saunders adds that as the number of start-up recruitment businesses increases, pay & bill services - effectively outsourcing the back office - will be an attractive solution for entrepreneurs within the sector, as it reduces fixed costs.

However, Saunders advises that recruiters need to speak to their finance provider and share their plans with them now if they want to be in a position to have ready access to funds.

Charlotte England, head of recruitment consultancies at Barclays, says the bank is committed to continue to support the recruitment industry. Recruiters have “a couple of options”, she says. In addition to invoice discounting, “it could be that they believe that equity funding is a better way to meet their growth ambitions”, she says.

A big concern during 2009 among recruiters has been ‘pay when paid clauses’, with claims that invoice discount finance was under threat where recruiters were working through RPOs.

RPOs said they needed the clause to protect themselves should the end user not pay them. This was exacerbated by lower credit insurance limits for recruiters supplying through RPOs.

According to Edward Winterton, regional director at Bibby Financial Services, this will continue to have an effect on “up front payments” depending on the creditworthiness of the RPO.

A lot of management teams have kept their powder dry during the downturn, and as the market returns these are the types of businesses we are looking to fund

While the high-street banks will clearly continue to play a major role in providing finance to the recruitment industry in 2010, some question the extent of their commitment.

Gary Edwards, head of the growth and acquisition finance team at Investec Private Bank, which has invested in Eden Brown, Matrix and GRS Kinsley Allen, argues that these banks “will continue to be reticent towards the recruitment sector”.

According to Edwards they have had their fingers burned by taking “a one size fits all approach” by providing term debt (for example, a loan of £10m repayable in quarterly instalments over four years) during volatile times. “Those banks that chose recruitment over the last few years will shy away from it,” he says.

Edwards himself says he is actively looking for staffing companies to fund next year. “A lot of management teams have kept their powder dry during the downturn, and as the market returns and their competitors weaken, these are the types of businesses we are looking to fund,” he says.

Edwards says he focuses on two main criteria when looking at potential investment opportunities: the quality of the management team and whether the recruiter had “planned its way in”, as opposed to entering a sector when it became fashionable, citing the public sector as a recent example.

Edwards expects to see more merger activity next year, as well as more use of revolving finance - primarily invoice discount finance, which is able “to meet the ebbs and flows of the business”.

Tim Evans, a director at Catalyst Corporate Finance, warns that the hangover from 2008 could continue for some time into 2010.

“In order to do deals worth north of £100m you must have access to money from external sources, banks and equity investors,” he says.
However, he warns: “Those investors, because they are not recruitment specialists, are generally very nervous about recruitment. They are very conscious that when the credit crunch struck, a lot of recruitment businesses shrank in scale very quickly.”

However, he believes that the banks will still show interest in the sector - albeit it will be selective and more limited than in the past. “A lot of banks will look very closely at how recruiters have performed through the downturn. If they have shown resilience they will be willing to lend but not at anything like the levels of 2005-07.

“If recruitment companies can show they are increasing their business at a strong rate, some equity investors may be willing to get on board,” he adds.

Ian Humphrey, managing director of Back Office Support Services, expects the levels of invoice discounting and factoring to increase as 2010 progresses. However, this will come at the cost of higher interest rates to recruiters, he argues.

“All the banks are rebuilding their balance sheets by charging more for their finance,” he claims. “If a recruiter already has a good deal, it could be a five-fold increase in interest; if it’s a less good deal, then maybe double. “

However, Evans rejects the view that banks will look to exploit the need for credit among recruiters by imposing “penal rates” and predicts a return to more responsible lending at fair rates rather than simply lending as much as possible.

That said, he argues that the lack of competition among high-street banks, following the merger of HBOS and Lloyds/TSB, will mean that banks will only lend to recruiters with “robust business plans”.

On the whole, Evans says that after a sticky Q1, recruiters will find it easier than this year to get access to the finance they need. But there again, after the year recruiters have had, that’s not saying very much.

 

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