An agency with 40 temporary workers on £15 an hour has a weekly payroll of around £28,000 once employer's National Insurance, holiday pay and pension are added. By the time the first client pays on 30-day terms, the agency has funded five of those weeks itself: roughly £140,000 out before a penny comes back. That weekly pay-and-bill cycle is why recruitment is the sector where invoice finance is most established.
The weekly pay-and-bill cycle
A temporary or contract agency runs two clocks that do not match. The pay clock is weekly: timesheets in, payroll run, wages, PAYE, employer's NI, holiday accrual and pension paid every Friday. The bill clock runs on the client's terms: invoices for the hours go out weekly or monthly and are paid 30, 45 or 60 days later, often after a further approval cycle inside a vendor management system (VMS) or managed service provider.
Pay-and-bill: paying temporary workers for hours worked and billing the client for those hours plus margin. The gap between the two is the agency's working-capital requirement.
Temporary and contract placements versus permanent fees
| Feature | Temporary and contract invoices | Permanent placement fees |
|---|---|---|
| Nature of the debt | Recurring invoices for hours worked, backed by approved timesheets. | One-off invoice, often 15% to 25% of first-year salary, raised on the start date. |
| Risk of reduction | Low once timesheets are approved. | High: rebate or free-replacement clauses if the candidate leaves within 8 to 12 weeks. |
| Typical advance rate | Often 80% to 90%. | Lower, sometimes 50% to 70%, or not funded until the rebate period expires. |
| Provider appetite | Strong; the core recruitment product. | Mixed; many cap perm at a share of the ledger or exclude it. |
Timesheets as proof of debt
Where other sectors prove an invoice with a delivery note, recruitment proves it with the timesheet: hours signed by the client's line manager or approved electronically through a portal or VMS. A provider will require approved timesheets to be reconciled with every invoice, verify a sample with clients, decline to fund hours not yet approved even if the worker has been paid, and check invoices against the rate card. Electronic timesheets that integrate with the provider's portal mean faster funding and fewer queries.
Back-office pay-and-bill providers versus standalone factoring
Alongside conventional invoice factoring and invoice discounting, recruitment has a product most sectors do not: a complete outsourced back office.
Back-office / pay-and-bill provider
- Processes timesheets and runs weekly payroll, including PAYE, NI, holiday pay and pensions.
- Raises and funds client invoices (often 90% to 100% of payroll cost) and runs credit control.
- Single percentage of turnover, higher than factoring alone; suits start-up and smaller agencies.
Standalone factoring or discounting
- Funds approved invoices; you run payroll and timesheets.
- Factoring includes credit control; discounting leaves collections with you, usually confidentially.
- Lower fees because the provider does less; suits established agencies, with discounting from around £1m turnover.
Many agencies start with pay-and-bill and move to confidential discounting once they have the systems and turnover. The factoring versus invoice discounting comparison sets out the trade-offs.
Umbrella companies and IR35
Since the off-payroll working rules (IR35) were extended to medium and large private-sector clients in April 2021, many contractors are paid via umbrella companies or agency PAYE, so the agency's weekly cash outlay rises because the full employment cost is invoiced up front. Providers also look at supply-chain compliance, since HMRC liabilities can rank ahead of the funder, and will ask which umbrellas you use.
Client credit limits and concentration
Each client is credit-checked and given a credit limit, the maximum balance the provider will fund for it; invoices above the limit are collected but not advanced. Agency ledgers are often concentrated, with three clients making up 70% of turnover, so recruitment specialists often agree higher limits than the standard 25% to 30%; ask how fast a limit can be raised when a new contract doubles exposure overnight. Where one client failing would take the agency with it, bad debt protection or a non-recourse facility covers approved-debtor insolvency up to the limit for a premium often around 0.5% to 1% of insured turnover.
Healthcare and nursing agencies
Agencies supplying nurses, carers and allied health professionals share the weekly pay cycle but add framework agreements, NHS trust and local authority payment practice, neutral-vendor portals and compliance checks that affect how invoices are funded. These are covered in our guide to healthcare recruitment invoice finance.
Eligibility for recruitment agencies
- A limited company; minimum turnover often from around £100,000 for factoring and pay-and-bill, £500,000 to £1m for discounting.
- Business clients of reasonable credit standing, with signed terms of business.
- Mainly temporary or contract turnover; perm-heavy agencies find fewer options.
- A timesheet process the provider can verify.
- Start-ups are often accepted, especially by pay-and-bill providers, on the strength of the client base.
The general eligibility guide covers criteria common to every sector.
Costs and limitations
Published market ranges for recruitment factoring put the service fee at roughly 0.75% to 2.5% of turnover, with discount charges around 1.5% to 4% over base rate or SONIA on funds drawn. Pay-and-bill services commonly charge an all-in 2% to 5% of turnover depending on volume. Minimum monthly fees are standard. Fees vary by provider and client quality; the invoice factoring costs guide explains every charge.
Advantages
- Funds weekly payroll against invoices typically 80% to 90% advanced.
- Facility grows with headcount without renegotiating a loan.
- Credit control and payroll can be outsourced entirely.
Disadvantages
- Fees of 2% to 3% of turnover take a noticeable share of thin margins.
- Perm fees are hard to fund and rebate clauses trigger repayment demands.
- Client credit limits may lag behind rapid growth.
Worked example: funding a weekly payroll
Illustrative example Industrial temps agency, one week's invoicing
- Hours billed (40 workers × 40 hours)
- 1,600 hours
- Weekly invoices to clients (charge rate £19.50/hour)
- £31,200.00
- Weekly payroll cost incl. NI, holiday pay and pension
- £26,400.00
- Initial advance (85% of invoices)
- £26,520.00
- Service fee (1.5% of invoice value)
- £468.00
- Discount charge (30 days at 3.5% over base, base assumed 4%)
- £163.00
- Balance released when clients pay (day 30)
- £4,049.00
Figures are illustrative estimates only and do not represent a finance offer.
The advance barely covers the payroll, which is typical: the margin arrives in the balance, not the advance. Charges of £631 against a gross margin of £4,800 is about 13% of margin, the real cost to weigh.
Funding payroll every Friday from your own cash?
Tell us about your agency, client terms and temp-to-perm mix and we will explain which structures may be worth enquiring about.
Frequently asked questions
Can permanent placement fees be factored?
Sometimes, on stricter terms than temporary invoices. A perm fee is a one-off invoice usually subject to a rebate or free-replacement clause if the candidate leaves within 8 to 12 weeks, so the debt can shrink after funding. Providers that fund perm fees apply a lower advance rate, cap their share of the ledger, or wait until the rebate period has passed.
What is the difference between a pay-and-bill provider and a factoring company?
A factoring company funds and collects your invoices. A pay-and-bill or back-office provider also runs the payroll: processing timesheets, paying workers, handling PAYE, holiday pay and pensions, raising client invoices and chasing them, for a single percentage of turnover. Pay-and-bill suits a new or small agency; standalone invoice finance suits one that already runs its own payroll.
Why does the provider want to see signed timesheets?
A timesheet signed or electronically approved by the client proves the hours were worked and accepted; an invoice without one is just a claim. Providers verify a sample of timesheets against invoices, and some only advance against invoices whose timesheets have been approved on the client's portal or vendor management system.
How does IR35 affect recruitment invoice finance?
Indirectly. Since the off-payroll rules reached medium and large private-sector clients in 2021, many contractors are paid through umbrella companies or agency PAYE, which increases the agency's weekly cash outlay and widens the funding gap. Providers also look at supply-chain compliance, because unpaid tax liabilities can rank ahead of them.
Will my funding line grow as the agency grows?
Usually yes. Funding is linked to approved invoices, so a new client or more headcount with an existing one increases available funds, subject to the facility limit and the credit limit set on each client. Limits are reviewed periodically and can typically be raised on request with evidence of the new contract.
Is bad debt protection worth having for a recruitment agency?
It depends on concentration. Agencies often rely on a handful of clients, and one failing can be fatal. Bad debt protection, built into a non-recourse facility or added to a recourse one, covers the insolvency of an approved client up to its credit limit for a premium of around 0.5 to 1 per cent of insured turnover. It does not cover disputes over hours.
Next steps
Have your client list with terms, an aged debtor report, recent payroll summaries and sample approved timesheets ready. If a client is already paying late, read what happens if a customer does not pay. Then request a quote, or see how other sectors compare in our industry guides.