How should recruiters deal with rising interest rates?
As anticipated, the Bank of England have this week raised interest rates to 3%. With inflation remaining high, expectations are that further increases can be expected over the next 12 months.
How does this affect SME recruiters and how should you prepare your business to deal with the changing trend?
In simple terms, the rise in interest rates means that it costs more to borrow money, so any variable finance that your business has in place will increase in the next few days.
The main area for borrowing in the recruitment industry is the funding of contractor payroll. The industry norm is to pay a contractor as soon as a timesheet is approved and send the client a corresponding invoice to the client which must be paid in an agreed period.
This "pot of borrowed money" will now cost more if you have an invoice discounting deal or if you are factoring invoices.
If you are working on very low percentage margins, you may start to notice increased costs. If you are lucky enough to be on +15% margins you should be able to suck the costs up a little longer.
It's probably not necessary to make any knee-jerk reactions to the interest rate rises, but it is sensible to be mindful of the trend and manage your business accordingly.
As interest rates rise, it becomes more important for recruiters to be paid promptly. Contrary to popular belief this is best achieved by the recruitment consultant doing the deal at the start of the process rather than the credit controller chasing debt at the other end.
Sensible payment terms should be agreed and the process for sending invoices clarified when the deal is completed - How should an invoice be presented? Where should it be sent? Does a PO need to be included? Etc. If the process is agreed upon and understood, the chances of being paid quickly are far higher.
In most cases, it is reasonable for a client to have up to 30 days to pay an invoice. Most companies are handling thousands of invoices and physically cannot pay quicker. If you change the 30-day payment terms printed on your invoice to 14 days, will you be paid any sooner? Probably not! Work with them – agree on the payment terms clearly and follow the process that you have agreed to, at least then you should not expect to be paid later than 30 days.
Some companies will demand payment terms of +60 days plus. This is still fundable, but in an era of higher interest rates long payment terms become more significant and you should certainly factor this into your pricing calculations. As a considerate supplier, you should be expected to allow a reasonable time to process payments. You are certainly not expected to provide a free loan!!
If you can be a bit more precise in setting up deals and conscious of reasonable payment terms it is very simple to reduce debtor days from say 45 to a still reasonable 30 days. This will give you a 33% saving on your interest costs!
We will soon be launching funding models that reward recruiters for having well-organized, prompt-paying clients.
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