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Sector

Recruitment agencies

An agency that supplies temporary workers pays them for the hours they've worked on its own payroll timetable, then invoices the client for those hours on whatever terms the client has agreed. The law doesn't let the agency hold back a temp's pay because the client hasn't paid yet, so the agency funds the gap, every pay run, for every temp on assignment.

Tell us what's happening How money moves in this sector

How money moves

The temps get paid before the client does

The gap is the time between the agency paying for hours worked and the client paying the invoice for them. As an illustration, an agency paying £40,000 a week to temps, invoicing weekly to clients on 30 day terms, has each week's pay out for about a month, so roughly four weeks of pay bill, around £160,000, is funded by the agency at any one time.

Temp payrollPaid out

  1. Temp works the hours
  2. Agency runs payroll and deducts tax
  3. Temp paid at the agreed interval, whether or not the client has paid

Client billingIncome

  1. Hours invoiced to the client, pay bill plus margin
  2. Client's agreed payment terms
  3. Agency paid

Running the agencyCosts

  1. PAYE to HMRC
  2. VAT on the full charge to the client
  3. Consultants and office

The agency carries the difference: pay on its own payroll timetable, reimbursement on the client's, and the whole gap grows with every temp it places.

Regulation 12 of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 says an employment business must not withhold, or threaten to withhold, a temp's pay for work done because it hasn't been paid by the client (legislation.gov.uk). A temp working through their own limited company can, in some cases, agree to opt out of these protections (regulation 32), but otherwise the obligation stands.

Where the sector gets misread

What a generalist lender sees, and what's actually happening

What a generalist lender readsWhat is actually happening

Large turnover on a thin margin

When an agency supplies temps as principal, it charges the client for the whole cost of the worker, and HMRC's VAT guidance says VAT is due on that full charge, pay, PAYE and National Insurance included. Much of the turnover is the pay bill passing through. The agency's real income is its margin.

Payroll as a cost it could delay in a tight month

Temp pay can't lawfully be held back because a client is late. Where a temp works under someone's supervision, direction or control, tax law treats the agency as the employer for income tax, so PAYE runs through its payroll too.

A growing business that shouldn't be short of cash

Every new temp placed adds pay that goes out before the client's first payment comes in, so a strong run of placements widens the gap before it adds any margin.

The measure that matters

Gross margin on the pay bill, not turnover

The useful numbers are what the agency keeps once temp pay and employment costs are taken out, and how many weeks of pay bill sit unpaid in the client ledger at any one time. Together they show the real business and the real size of the gap.

Turnover alone makes a temp agency look far bigger and far less profitable than it is, because it includes every pound of pay the agency is passing on to its workers.

Where finance fits

Invoice finance, paced to the pay run

Your situationUsually fitsNot this
Payroll gap across the whole client bookInvoice finance that releases funds often enough to meet each pay runA business loan sized on net profit
One or two large clients driving most of the gapSelective invoice finance against those accountsWhole-ledger discounting on a concentrated book
Placements growing faster than the current facilityA credit line alongside invoice financeAssuming the existing facility scales on its own
A facility can fund the pay run while clients take their terms. It can't make a thin margin wide enough to cover a client that doesn't pay at all.

Whether clients should know a funder sits behind the invoices is a real choice. Confidential invoice discounting leaves the client relationship as it is; factoring adds a collections service that can suit a smaller agency without its own credit control.

Sources

Where these points come from

Talk it through

Need another perspective?

Describe where things stand in a sentence or two: who pays, how, and where the gap sits. We'll tell you whether it's something we can help with. There's no charge for this.

Your enquiry is read by a person at Established Finance, not a call centre or an automated queue. We use it only to work out what's likely to fit and reply to you. We don't share your details with anyone else unless we introduce you to a specialist partner, and only with your agreement at that point. Sending this doesn't appoint anyone or create a professional engagement, and there's no obligation at any stage. See our privacy policy.

What happens next

  1. A person on our team reads it against how businesses in this sector are actually paid.
  2. If we can help, we introduce you to a specialist partner we have vetted and tell you who they are.
  3. No charge and no obligation at any point. You decide whether to go further.
Adam Parker

Adam Parker

Founder of Muswell Rose Consulting Ltd, which trades as Established Finance · former Managing Director of Penny, an invoice finance business, with 15+ years across mortgages, commercial finance and fintech lending.

Last updated:

Practical questions

Before you get in touch

What information do I need?

To start, just a description of what’s actually happening in the business. If it progresses, the specialist partner will ask for the usual things: recent accounts, a sense of turnover and trading history, and details of the specific need.