Recruitment firms are being encouraged to reconsider their finances following recent legislative changes that could see banks exert greater controls over their clients’ accounts.

The advice comes from Venture Finance following its recent survey of recruitment firms’ financing. It believes recruitment firms should move away from traditional overdraft financing to invoice finance, to release the value of unpaid invoices immediately, before banks raise overdraft costs.

Steve Websdale, director at Venture Finance, said: "Most organisations would benefit from improved cash flow, so I would urge the permanent sector to follow the temporary agencies’ lead and increase their use of invoice

finance.”

Its survey found that almost half (47%) of temporary agencies use invoice finance to provide ongoing working capital. None relied on a bank overdraft to manage cash flow fluctuations.

However, overdraft funding was the main source of funding for 31% of permanent agencies, with only 17% using invoice finance.

With invoice finance, recruiters can raise cash from lenders based on how much they are owed by their clients. However, the client remains their debtor. Factoring goes one step further. The recruiter can turn the debt over to a third party for a percentage of the total owed.