The recruitment sector is being hit on a number of sides in the recession because of the very nature of the industry. Not only is business slowing because of less activity in other markets, but recruitment agency debtor days are increasing, which impacts on their already turbulent cash flow.

The cash flow situation for recruitment agencies naturally has peaks and troughs. Agencies with a greater proportion of their business arising from permanent placements usually invest several months in placing a candidate before receiving payment for their services.

Agencies whose emphasis is more on temporary placements may have more regular and certain turnover, but many are reporting difficulties arising from clients taking longer to pay their invoices.

The irregular financial performance and cash flow, and the difficulties in forecasting future financial performance, can lead to breaches of banking covenants.

Banking covenants are conditions that govern a lending agreement between a bank and its customer. The basic tenets of banking agreements generally relate to the borrower making regular repayments of capital and interest. Covenants within these agreements will therefore tend to focus on the customer’s ability to service the debt and interest payments in profit and cash terms, in the immediate and longer term. For example, the bank might stipulate that the company’s net assets cannot fall below a certain level or that certain key financial ratios must be maintained.

If these covenants’ conditions are not met, the bank’s assessment of its risk in lending to the customer will change; this may allow the bank to renegotiate the terms of the lending, including increasing the interest rates.

In the most extreme circumstances, breaches of banking covenants may lead to the bank making a demand for repayment and, if this cannot be met, may lead to the bank seeking to recover its indebtedness by way of an insolvency process, potentially bringing an end to the business life of the company.

If your agency is starting to show signs of difficulty, there are a number of actions you can take to protect your business.

Early communication of difficulties with your bank is essential. As covenants are based on historic data and are often tested no more frequently than quarterly, by the time that the covenant is breached, the business will already be experiencing difficulties.

Your bank will, in all but exceptional circumstances, want to work with you and may be willing to renegotiate terms to ease the immediate cash flow problems of the company by allowing the debt to be repaid over a longer period. Generally, the bank would rather see a steady and certain repayment rather than irregular and uncertain repayments.

Credit control is a critical factor for businesses and it will become ever more so as the recession continues and the trading environment worsens. Where the timely recovery of receivables from customers is or may become an issue for your business, you might consider employing a full or part-time credit control specialist to chase repayment of your invoices.

Should you feel that your business is genuinely in danger of failing, it doesn’t have to be the end. If you act swiftly, there may still be restructuring options, which may involve receivables financing (invoice discounting), credit insurance or even an insolvency process, that are available to you which could allow the company or business to survive.

It is clear that there is no ‘onesize fits all’ solution for recruitment companies in financial difficulties. The best thing that you should do if your company is starting to suffer is seek professional advice and open the channels of communication with your bank as early as possible.