Recruiters who rely on invoice discounting may no longer be able to secure the funding they need, according to the head of one of the UK’s biggest recruitment finance providers.

Paul Saunders, director of Lloyds Banking Group recruitment finance division, told Recruiter that because of a commonly used ‘pay when paid’ clause in the contracts between recruiters and recruitment process outsourcing (RPO) companies, Lloyds “may need to restrict funding unless this clause can be removed”.

The clause protects the financial position of RPOs by ensuring they only have to pay recruiters once they themselves have been paid by the end user. “The ‘pay when paid’ clause pretty much trumps the normal situation, because the RPO can tell us ‘sorry we have not been paid, so we are not paying you’,” said Saunders. when paid’ clauses has been exacerbated by falling credit ratings among RPOs and lower credit insurance limits for recruiters supplying through them. He said another factor making finance discount providers reconsider their lending was the growth of RPOs.

Whereas in the past the lender’s risk was spread among a large number of end users, this risk was now concentrated into a much smaller number of RPO firms.

If the client doesn’t pay the RPO, in the long term, how can we fund our business against invoices?

The cumulative impact of all these factors was that providing invoice finance to recruiters where an RPO was involved had become increasingly risky, he said.

Stephen Grant, director and owner of Citi Tech, told Recruiter that ‘pay when paid’ clauses were a growing concern: “If payment is delayed then we have no right to be paid, and no right to collect payment.” And he revealed that earlier this year one bank had declined to provide invoice discount finance to his firm where an RPO was involved. “If the client doesn’t pay the RPO, in the long term, how can we fund our business against invoices?” he said.

Marilyn Davidson, a director of the Association of Professional Staffing Companies (APSCo), told Recruiter that in the summer several members complained that “some of the invoice companies were not underwriting contractors’ pay when ‘pay when paid’ clauses were in place”.

Grant said he had asked the RPOs to remove the clause, but they had refused. “Their view is that the ‘pay when paid’ clause is here to stay.
We have to live with the new scenario,” he said.

However, Kevin Barrow, a partner at law firm Blake Lapthorn, said that following agreements between finance providers, RPOs and recruiters, he had helped remove ‘pay when paid’ clauses from contracts between RPOs and recruiters on two separate occasions. He added that his firm had been approached by four major invoice discounters, who were worried about lending to recruiters where an RPO was involved. Barrow estimates that “well over half” of all recruiters use invoice discount finance, though not necessarily for their entire payroll.

Neither Hays nor Hyphen would comment on the issue, while neither Comensura nor Matrix returned Recruiter’s calls.

Matthew Sanders, managing director at supplier consolidator de Poel, told Recruiter that while the ‘pay when paid’ clause was a standard part of the company’s contracts with recruiters, de Poel had not received requests from recruiters asking for the clause to be removed.

Royal Bank of Scotland Invoice Finance told Recruiter it was “aware of the issues surrounding RPOs, and the potential impact this has on our ability to provide invoice finance facilities”. It said it would continue to provide “significant support on a case-by-case basis”.