Some business models make intuitive sense.
Consider retail: customers pay money for a product or service. There is a clear exchange happening between both parties that is easy to understand. However, not all businesses follow such a straightforward model—such as staffing agencies.
So, how do recruitment agencies work? Keep reading to find out!
In simplest terms, recruitment agencies are the mediator between employers and their soon-to-be employees. Their objective is to match those looking for jobs with positions at companies with vacancies that need to be filled.
Typically, the business looking to fill a vacancy will pay staffing agencies to handle the entire hiring process on their behalf. This includes crafting the job description, conducting outreach, vetting candidates, handling the paperwork once someone is hired, and onboarding.
Staffing agencies are particularly beneficial for companies that work in skill-intensive industries, such as healthcare, education, finance, and marketing. Working with a recruitment agency can save a business time and money that they would have otherwise devoted to courting potential candidates.
What’s interesting is who pays the recruitment agency. You might be inclined to think that a job seeker would pay for this help, but the party that benefits the most—and who ultimately pays for their service—is the employer. After all, they’ve just been delivered a slam-dunk candidate to fill an organizational vacancy!
Recruitment agencies work by charging companies in two ways: percentages or contracts.
The former is more straightforward. On average, this number ranges between 15-25% of what the newly-hired employee is set to make in their first year. So, for example, a company might pay the agency $10,000 for a $50,000 per year employee.
However, that $10,000 can take anywhere from 30, 60, or even 90 days to process. This is an example of the many financial challenges these agencies experience.
An even more challenging situation is when a staffing agency is hired to “work on contingency.” What this means is that the recruiter will only get paid if the organization selects one of their candidates—in this case, the recruiter may not get paid at all if they don’t find a suitable fit.
With contracts, the recruitment agency brings the newly-hired employee onto their payroll, then bills this cost back to the company with fees on top for their work. Typically, it’s 1.5 times the employee’s wage. Unfortunately, this is where staffing agencies find themselves not being paid for 120 days or more, depending on how the company operates when dealing with recruitment firms.
In reality, most recruitment agencies deal with large, enterprise-level organizations that operate with stringent payment terms and a surplus of red tape. This can cause major financial bottlenecks for the recruitment agency, as they can’t sustain their operations and pay their staff with IOUs.
The solution? Invoice factoring.
Invoice factoring is a type of financial agreement in which a company—in this case, a staffing agency waiting to be paid—sells some or all of its invoices to a third party known as a factoring company for an immediate boost to their cashflow.
Typically, the factoring company will pay its client—the recruitment agency—for the majority of the value of its invoices. Then, they’ll collect the remaining money from the client, which, in this case, would be the organization that hired the staffing agency.
The factoring company makes its money by deducting a small fee from the remaining percentage of the money it collects from the customers of its clients. For our purposes, this means the factoring company would charge a fee on the last 10-20% of the money it collects from the initial organization when paying it back to its client (the recruitment agency).
Do note there are two kinds of invoice factoring: recourse and non-recourse.
Recourse is most common, and involves the company (the recruitment agency) agreeing to buy back any invoices that cannot be collected from their customers. The latter involves the factoring company assuming the risk of non-payment. Offloading this risk onto the factoring company understandably comes at a steeper cost.
Invoice factoring is not a loan for a few reasons.
While, yes, invoice factoring is not free—the factoring company needs to make money—it does not involve paying interest. You’re paying them once for their service rather than being charged at an increasing rate for the money you borrowed.
Invoice factoring also differs in terms of limits and credit evaluations.
Banks place limits on how much money they are willing to loan. They will also perform a credit check on your business to further restrict and control the process, ultimately ensuring the borrowing agreement is fully in their best interests.
Conversely, factoring companies do not have such limits. As far as credit evaluations go, they are more concerned with the reputability of a company’s customers as they impose their fee on the money they collect from them.
For many recruitment agencies, invoice factoring is a necessary part of their business models as they navigate fluctuating cashflow.
Rather than being hamstrung while they wait for payment, staffing services companies can get roughly 80% of the money they’re expecting right away. This grants them the financial flexibility to pay their employees, keep the lights on, and continue doing business. This is particularly true when the economy is struggling due to global instability.
Furthermore, businesses that may be struggling with their credit can feel comfortable pursuing invoice factoring because they are not “borrowing” anything. They’re getting an advance on money due to them for labour already expended.
There you have it, the “How do recruitment agencies make money?” question answered and explained. Invoice factoring is the key to it all.
If you’re a staffing agency looking to diversify your accounts receivable, be sure to partner with a trustworthy factoring company that offers competitive rates and great service. The good news is that REV Capital takes pride in checking all these boxes!
We’ve earned our reputation as one of the leading factoring companies in Ontario. Our team of experts put you first, working to form relationships that give your business the financial flexibility it needs to continue to thrive and prosper.
Apply today to get started!