Invoice financing can alleviate the cashflow challenges which so often plague recruitment agencies, especially those in the temporary sector.

However, getting the best invoice finance arrangement means your business should be in the best possible financial shape.

That’s because lenders will scrutinise your company’s financial records to determine creditworthiness – the stronger your position, the better the options that will be made available to you.

That said, it works both ways. A good understanding of due diligence will also help you choose the right partner and go into an arrangement in full awareness of the expectations of both parties.

How lenders reduce their risk through due diligence

With invoice finance, the risk to the lender comes from both the borrower (your agency) and your customers, because no matter how reliable you are as a borrower, your customers could still default. For this reason, financial due diligence plays an even more critical role in lending decisions than for standard credit facilities and loans.

Lenders seek to mitigate risk through a due diligence process that looks at the borrower’s capability to repay. They want to avoid a situation in which the borrower defaults on the loan. A good due diligence process instils greater confidence, assuring lenders that their investment is secure.

A successful financing arrangement benefits both parties, and due diligence is critical because it verifies the borrower’s financial health and the feasibility of the agreement, fostering a relationship of trust and cooperation. With each side aware of the potential rewards and risks, the financing agreement becomes a win-win solution.

The due diligence process

Due diligence focuses on the borrower’s credit history, financial statements, and existing liabilities to ascertain their capacity to make repayments. Various areas will be scrutinised including invoices and your overall financial stability.

• Invoice validation

One of the most important factors is the verification of the invoices being financed. They will want to assure themselves that invoices are authentic, that the debtor exists and that services have been delivered as per the invoice.

• Financial stability
  Beyond just creditworthiness, a borrower’s financial stability and growth potential are important considerations to a lender. Stability indicates a borrower’s ability to withstand financial fluctuations, and their potential reveals how likely they are to grow and succeed over the contractual period.

Invoice finance lenders favour agencies with a steady stream of high-value contracts, as they make their money through interest and fees on each loan. Therefore, an established agency with strong prospects and a thriving sales ledger may attract preferential terms due to their long-term income potential for the finance provider.

For a start-up, it can be difficult to show financial stability. That said, you can justify your outlook through financial projections, sample clients and your history of dealing with those sample clients. Your rates should show enough margin to allow for profitability after invoice finance costs.

Assessing the risks

Due diligence is also instrumental in identifying and mitigating potential risks. Lenders will seek to uncover hidden liabilities including pending lawsuits, or operational inefficiencies that may affect your ability to repay. Mitigating these risks before you look for a lender helps ensure a smooth invoice financing process, and help you get the best arrangement.

As a start-up agency, you should expect to have to pay a higher price due to the increased risk. However, over time and with greater volume of work, your rate will reduce.

Expand your capability with Workwell Outsourcing by your side

If you want to learn more about due diligence meaning in finance or need help with invoice financing, contact our expert team today. We can help you navigate the intricacies of financial due diligence and get the best arrangement to help your business grow and succeed.