FROM JUNE 2014’s RECRUITER MAGAZINE

As market conditions improve, it’s looking like a good time for recruitment firms to secure funds for expansion. Scott Beagrie looks at the options available

After all the talk of recovery and growth, if the recruitment industry needed a tangible sign that the good times might just be returning, it would be the public equity markets’ interest in the industry in recent months.

Adrian Kearsey, head of small capital research, support services, at financial advisory firm Sanlam Securities, points to strong share price increases over the past year from the likes of Harvey Nash (up 71%) and Matchtech (up 80%) as evidence of this interest, alongside Staffline Group’s having more than doubled (up 112%). The latter raised £16m by placing 2m shares at 800p — at the time of writing they were 910p — to fund its acquisition of Avanta Enterprise. “So that indicates the equity markets are open for financing staffing growth,” says Kearsey, who adds that the industry hasn’t seen a “meaningful staffing” IPO (initial public offering) since 2007. “We have had some small fund raisings, but the Staffline transaction sends a clear signal.”

The availability of public market equity as one of the channels for financing growth is more of a symbolic one than a real option for the vast majority of small and medium-sized enterprise (SME) recruitment businesses. Nonetheless, many of these with aspirations of growth will be encouraged by the confidence the market is showing in their industry. 

At the start-up or smaller business end, there are several options, the most obvious being banks that have a specialist arm in the sector. According to Sean Dixon, head of business services covering the recruitment sector at Royal Bank of Scotland (RBS), it is vital that recruitment business owners not only share their plans and strategy with the bank but are also candid about their strengths and weaknesses. “What is their strategy if things don’t go according to plan? — because the person from the bank needs to be able to articulate the client’s story when they are trying to convince the credit departments to lend them money,” he says. “The more people are open, honest and share information, the more chance they have of a good hearing. So if you have a weakness, how can we mitigate it? Because one of the things banks don’t like is surprises.”

David Roust, relationship director and head of the recruitment industry team at Barclays, reckons that for “prudent banks”, there are several basics that must accompany any request to support a business. “It has to be a business we understand, a management team that we have met and understand, and a business plan that makes sense,” he says. “As a bank that supports the sector, we understand all the issues the industry faces.”

As well as the banks, some industry watchers report anecdotally that more angel investors are beginning to appear on the radar, although there are no concrete figures to support this yet. Recruitment entrepreneurs who feel they can put a strong case to such an angel, and want to connect with potential investors, should do their research. Websites such as www.angelinvestmentnetwork.co.uk are good places to start.

There are also seed and growth capital companies specialising in the recruitment sector, with the James Caan-founded Hamilton Bradshaw among the biggest names. Last year, James Caan also launched Recruitment Entrepreneur, a seed capital investment company that provides funding of up to £500k, plus a package that includes all of the infrastructure required to set up the business, along with mentoring and legal help.

The company reports that the first two funding rounds received interest from some 4,000 entrepreneur recruiters and 900 business proposals. The third round has just closed (8 June) but Amy Golding, chief operating officer of Recruitment Entrepreneur, tells Recruiter it will re-open in September for three weeks, and she offers this advice for applicants: “A lot of people think they have to stand out by being original, saying something new or outrageous. It’s an old adage, but often the best entrepreneurs are those who take ideas that work and do them better. The applications that stand out to myself and James Caan, are those that clearly demonstrate credibility, market knowledge and a strong track record. These things speak for themselves above and beyond anything else.”

For many recruitment businesses, the only asset available to raise finance are invoices, so hence invoice financing remains one of the preferred options for many recruitment businesses looking to grow organically. RBS’ Dixon describes invoice financing as “a structured and sensible” way of financing a recruitment business over its cycle. “So as contractors and the growth in the business increases, then the facility grows alongside it,” he says, reporting that the bank has supported clients with this service consistently through the downturn. But he adds that firms can borrow more through the service if they have a contractor book, as opposed to permanent staff-only business. “Permanent does have some wrinkles around it in terms of the invoicing and the way the debt is eventually paid,” he says. “But for contractor books, we are firmly open for business.”

Roust at Barclays agrees that while at the higher end it might look at options such as revolving credit facilities and access to capital markets, for the majority of clients in this sector invoice-sales financing is the “most appropriate” source of funding, especially for those operating in the contractor and temp space. “If the business takes off, it is that debtor book that increases quickly,” he says. “So as the need arises [for funding], you can increase the availability of that facility quickly and easily to enable the working capital to flow into the business to support that growth. In the same way, it can unwind pretty quickly if the business quietens down.”

When exploring options for invoice financing, it is likely that business owners will hear several terms bandied about. Steve Hartley, group chief operating officer at accounting and back office support provider Outsauce, says it is important to remember that factoring, invoice finance, sales finance, invoice discounting, recourse and non-recourse single invoice finance, securitisation (for larger entities) are all the same product, offered with different combinations of service and risk management functionality.

“These include disclosure (or not confidential), credit control, debt collection, credit/invoice/debtor insurance or protection, ledger mirroring debenture security and more,” he says. “For a short-term bridging need, it is possible to finance single invoices or single customers within ledgers.”

Businesses looking for invoice finance should research the market thoroughly. The advice from some experts is to directly contact two or three providers rather than go through brokers.

Hartley says that the broker market has tidied up its act but there are some unscrupulous ones that encourage “churn and fees for life” inevitably funded by their clients, so he cautions firms to choose carefully if taking this route. When holding discussions with providers, he advises recruitment business owners to ask them how they propose to react to different sensitivities that might be applied.

“Test over-trading scenarios as well as shortfalls,” he says, and adds: “Don’t buy on price without clear reference from other users. Watch for minimum charges, but understand that provision of a service requires paying for even when volumes dip.”

If the economy remains on track and market conditions continue to improve, some recruiters that may have had an anti-acquisition approach in the past could see this as an opportunity to grow. Dixon reckons that several recruiters have acquisition on their strategic agenda, and expects to see activity in this area over the next 12-18 months. Miles Lloyd, chief executive of Outsauce, suggests it may be time for many recruitment businesses to acquire rather than organically evolve. “Building relationships, gathering knowledge and winning contracts takes time,” he says. “It is often more efficient to acquire an established business instead. This approach allows you to take advantage of target markets immediately, while giving you flexibility should market conditions change, rather than committing your core business upfront to a long-term, resource-intensive evolution.”

Lloyd adds, though, that it is important for firms to balance their risk profile, because if growth is coming from around 20% of existing clients and business owners focus on these to the exclusion of other clients and new business, the risk will be compounded. “Good times should be used to put more eggs in baskets — achieving a better risk profile, and making a business more robust in a future downturn,” he says.

Funding checklist

Must do’s when trying to secure finance for growth

• Choose providers that are specialists in the recruitment sector that will understand the issues you face. 

• Have a clear strategy and business plan, and make sure you can articulate it well.

• Be open and honest at all times, including about your potential weaknesses as well as about strengths.

• Make certain you understand the implications of the product offering, and run though both good- and bad-times scenarios with the provider.

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