For recruiters, there’s nothing better than experiencing the exhilarating rush that comes with growth and success. Yet, amid all the excitement, there's an often-overlooked threat lurking: bad debt.
As the owner of a recruitment agency, you naturally just want to focus on doing what you do best: finding and placing the best possible candidates for your clients’ needs. However, as every entrepreneur knows, there are often a lot of time-consuming business administration tasks, such as ensuring you get paid for the services you provide, that can derail your work and leave you feeling stressed out about the future of your business.
First off, it’s important to understand what bad debt is and the most effective methods of managing it. This will not only allow you to focus the majority of your time and energy on your field of expertise, but also help ensure the long-term growth and success of your agency.
In this post, we’ll discuss bad debt in more detail and explore how your recruitment agency can be protected against it.
1. What is bad debt?
2. What is the impact of bad debt on recruiters?
3. How can recruiters protect themselves from bad debt?
4. What is bad debt protection (BDP)?
5. How does bad debt protection work?
6. How does 3R help protect you against bad debt?
What is bad debt?
Bad debt refers to money owed to your agency that is unlikely to be recovered. It occurs when clients fail to pay invoices for services rendered.
There are a number of reasons or scenarios why clients are not paying their invoices on time. They could include legitimate reasons, like not having received your invoices correctly according to their accounting system, or not having the correct details, such as a purchase order (PO) number, quoted on the invoice.
On the other hand, the client could be experiencing serious cash flow problems, and be unable to pay the invoice on the due date.
In more extreme cases, a sudden economic downturn or catastrophe in a specific industry, might affect jobs across the entire sector, and although your clients in that sector might have recruitment contracts in place, they may have to suddenly cut staff, implement a recruitment freeze, or be unable to pay their debts for a certain period of time.
While some overdue debt might be recovered through debt collection efforts, bad debt that is unprotected typically represents irrecoverable losses, meaning your business will have to take the loss.
What is the impact of bad debt on recruiters?
The impact of bad debt on recruitment agencies can be significant. It directly affects cash flow which can have a knock-on effect on operational capabilities. When clients don't pay invoices, agencies will be left to pay contractors, leading to constant outflows without corresponding incoming payments from the client. This strains cash reserves, and if you need to borrow money to cover the cost, this will incur interest expenses, further impacting your profitability and potentially hindering your growth. Un-paid contractors can also be a serious reputational risk for your business.
Simply put, bad debt consumes resources that could be better allocated to serving clients and expanding your business. In extreme cases, it can even threaten the viability of your agency, so it’s something you want to avoid at all costs.
How can recruiters protect themselves from bad debt?
The good news is you can put a number of solid strategies in place to mitigate the risk of bad debt and ensure financial stability for your recruitment business.
Implementing regular credit checks
Conducting regular credit checks on potential clients allows your agency to assess their financial health and creditworthiness before you enter into a contract with them. This proactive approach helps identify any red flags or potential risks associated with clients who may have a history of late payments or financial instability. You want to make sure you’re putting your time and energy into growing your business with clients who are financially stable, otherwise it’s simply not worth it. Read our full blog post about how to carry out proper credit checks on clients here.
Set clear contracts and payment terms
It’s really important to set out clear and concise contracts outlining payment terms, including deadlines, methods of payment, and penalties for late payments as well as confirming the right points of contact for invoicing. By making sure you have a clear mutual understanding and agreement upfront, and the correct invoicing information, you can minimise misunderstandings and any disputes regarding payments later on.
Efficient PO management
Streamlining PO management processes will help you ensure better accuracy and timeliness in your invoicing. By efficiently tracking and managing your POs, your agency can avoid delays or discrepancies in invoicing, and reduce the likelihood of payment issues down the line.
Consistent invoicing and reminders
Timely and consistent invoicing, accompanied by proactive reminders when payments are due, encourages prompt settlements and creates a culture of accountability among your clients. Automated reminders or follow-up communications can help maintain regular cash flow and minimise the risk of overdue payments.
Debt management and credit control
Implementing effective debt management and collection services or credit control measures is essential for handling overdue payments promptly and efficiently. This may involve establishing clear escalation procedures, having dedicated staff or partners to take care of credit control, and outsourcing recruitment debt collection to specialised agencies when it becomes necessary. However you do it, the ultimate objective is to make your aged debt report one of the most important tools in your approach to managing your business and ensure a healthy cash flow.
Bad debt insurance
Investing in bad debt protection mechanisms, such as credit insurance or setting aside reserves for potential losses, provides an added layer of security to help cushion the impact of non-payment incidents on your agency's finances in the face of unforeseen circumstances.
What is bad debt protection (BDP)?
Bad debt protection (BDP) is a specialised financial mechanism designed to safeguard businesses against the risk of non-payment by clients that become insolvent and are unable to settle their invoices. It provides you with a safety net, giving you the peace of mind to know that as the recruiter, you will receive payment for the services you provide, in all circumstances. The overall objective of bad debt protection is about safeguarding your business and reducing the risk of trading with clients.
How does bad debt protection work?
Bad debt protection works by transferring the risk of non-payment from the recruiter to a third-party provider, typically a financial institution or insurance company. Recruiters typically pay a fee or premium for this service, which varies based on factors such as the creditworthiness of clients and the level of coverage desired.
If a client fails to pay an invoice covered by bad debt protection, the recruiter can then claim the amount, within a certain value range, from their provider. Upon verification of the claim, the provider reimburses the recruiter for a percentage of the original outstanding amount, normally up to 90% of the invoice value, thus minimising the impact of bad debt on your agency's finances.
How does 3R help protect you against bad debt?
One of the great advantages of working with 3R is that bad debt protection comes standard as part of our funding solutions along with fully outsourced credit control. This means that in addition to all the other benefits of our back-office and funding solutions, you can take the administrative burden of debt control off your shoulders and protect yourself against the risk of non-payment, without paying extra for it.
Our back-office system offers you unlimited free credit checks to ensure you minimise the risk of non-payment by keeping your client operating within an agreed credit limit. You’ll also get superior PO management tools, consistent invoicing methods, automated reminders, debt management, and instantly accessible reporting capabilities. With all of these tools in your arsenal, you can confidently keep your agency primed for growth and navigate even the most challenging times in the industry.
To find out more about bad debt protection and our funding solutions or to get a demo of our back-office system, give us a call on 01489 854 741.
