The recruitment process outsourcers (RPO) market has seen significant levels of growth over the last 10 years as corporations reap the benefits of total management of the recruitment function.
Yet for manpower agencies supplying temporary staff to corporations, with RPO contracts come uncertainty and increased levels of financial risk.
In particular ‘Pay when paid’ clauses have presented a significant problem for manpower agencies, as they have the potential to affect their cash flow.
In this article Trade Credit Insurance and Invoice Finance specialist Sean Weston speaks to Simon Belton about how manpower agencies can mitigate the risks associated with RPO contracts:
“Underwriters of invoice finance, the favoured finance facility of the manpower agency market, have identified the risk of:
- Payment to manpower agencies, conditional on RPOs being paid first by their clients.
- Late payment by RPO clients’ impacting negatively on manpower agencies.
- Should the worst-case scenario happen and an RPO’s client fail, then there is no obligation for the RPO to pay the manpower agency.
Of course it should be noted that the vast majority of the clients utilising RPOs are financially sound. This means default should not be an issue.
However as a consequence of the perceived risk by underwriters, manpower agencies have seen high street bank owned invoice financiers restrict funding on RPOs to circa 10-20% of their total ledgers. Although, it has to be said some independent invoice financiers have been more flexible.
Fortunately there are solutions available to manpower agencies to help them overcome ‘Paid when paid’ contracts.
How credit insurance can help manpower agencies
Invoice financiers do take some comfort from credit insurance that can be obtained:
- Directly from an invoice financier in the form of a non-recourse invoice finance facility.
With credit insurance options include:
- Taking cover on RPOs in the event of their failure: Although this means in effect the issue regarding the failure of an RPO’s client still remains.
- Protracted default: In the event of a late payment by an RPO either the invoice financier or the credit insurer makes a payment to the manpower agency. Although this option is not normally available for “Pay when paid” contracts.
- Obtaining cover on both the RPO and its client: This option potentially includes protracted default. Here though the cost of the policy will increase as there will be an additional cost to insure both entities.
Consequently it could be argued that taking out insurance on RPOs should provide sufficient comfort for manpower agencies.
How consideration of the financial strength of all parties involved can help
When underwriting risk, some invoice financiers will consider the financial strength of an RPO’s clients, and the concentration of turnover on the RPO. For example clients such as Local Authorities would be considered a good credit risk. In this scenario the invoice financier would be more likely to fully fund whole transactions without the need for credit insurance.
This will be especially true if both the manpower agency and the RPO were also deemed to have a good financial performance.
RPOs are set to remain a feature of the recruitment sector. This means manpower agencies need to fully understand the risks associated with their contracts, especially in respect of obtaining funding from invoice financiers for these arrangements.
On a positive note, there is little doubt that on-line systems used by RPOs to manage timesheets for agency staff clearly benefit manpower agencies in terms of accurate records of hours worked and monies owed.
And finally, with over 10 credit insurers and 100 plus invoice finance companies in the market, we recommend manpower agencies speak to an independent business finance or credit insurance specialist to ensure they obtain facilities that work best for the profile of their businesses.”
About the Authors: Director of Business Finance Broking Simon Belton has over 25 years experience in the Asset Based Lending sector. Simon brings with him a wealth of experience within the broking industry. He has also worked for a number of the leading financiers, both in the UK and internationally.
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Sean Weston, 33 years of experience in the ABL industry predominantly in the credit protection arena with ABN Amro Commercial Finance, RBS Invoice Finance and International Factors. Today Sean is working for 64G Ltd, helping businesses to grow securely with trade credit insurance policy management, credit control and sales ledger management services.