Unsurprisingly, recruiters are feeling the pinch more this year. Sarah Coles investigates the options available to help resurrect failing companies

The high profile collapses of Greatfleet and TVeritas IT were shocking for their size and seeming speed of demise, but they weren’t particularly unusual. Financial publisher Plimsoll occupied the gloomier end of the spectrum when it reported that a quarter of recruitment agencies and 9,333 jobs were at risk, but few would argue that trying times are upon us, and in the coming months there will be many more casualties among recruitment firms.

Paul Saunders, director of recruitment finance at Lloyds TSB, says: “There are more failings than this time last year and it may well increase further.” But there are financing options that can help turn this tide.

There may be those who simply give up and turn over and die, but there are other firms staving off insolvency with a much-needed injection of new money. Hugh Fell, head of recruitment finance at Lloyds TSB, says: “With the raised level of bad debts, more recruiters need us to lend in order to allow them to restructure and stay in business.”

Meanwhile, others are shaking off business failures by ‘pulling a phoenix’ — rising from the ashes of the business with the same staff, same clients and a new name. Fell points out: “There has been an increased level of reincarnation.”

This isn’t simple, as financing isn’t as readily available as it once was. According to a survey carried out by Cambridge University’s Centre for Business Research, 29% of small businesses seeking finance in 2007 were wholly or partially rejected, compared to 26% in the previous survey in 2004.

The Forum of Private Business says funding could have become even tighter since the most recent survey, as a result of the economic downturn. “The research shows that, although the funding requirements of small businesses rose steadily during 2007, the likelihood of banks awarding funds fell just as steadily,” says Nick Palin, the FPB’s director of finance and administration.

Some providers will flatly refuse finance. Fell says: “Some high street banks have a policy that they won’t fund a phoenix.” Others will reject where the prospects look less rosy. He continues: “We would want to understand why the business failed, whether it was a bad debt or they lost control of cash flow.”

Stephen Fern, a director of LC Corporate Strategies, specialises in getting companies into a position where they will be considered for further lending. He says he may get involved in cash flow management within companies where a lack of financial knowledge has contributed to a funding shortfall. Investors may also be wary where there are

issues with Her Majesty’s Revenue & Customs (HMRC). Fell says: “The Revenue is looking closely at labour suppliers. Most of the turnover is VATable, so there is high exposure and high risk to the Revenue. They see this as an area of tax leakage. So we try to forecast the Revenue’s attitude to the phoenix, because if they are on the wrong side of HMRC they can delay issuing the VAT number, which causes administration problems, which ties up continuity for the business.”

Fern says around 70% of his work relates to the Revenue and PAYE issues. He says: “The problem for a lot of recruitment companies is PAYE arrears, which can run into hundreds of thousands of pounds. We negotiate a payment arrangement to spread this over a period from three months to three years. It eases cash flow and is one less thing for the funder to worry about.”

Where banks refuse, there may be some joy to be had from an invoice financing, or factoring, company. Nigel Simkins, operations director at Charterhouse Group International, says: “We are able to be more flexible than banks, as we take security of the book debts. We get a lot closer to the debtor and develop a relationship, and may eventually collect the debt.”

However, they too will take precautions. Simkins points out: “We are careful of individuals with a chequered past. Previously, factoring has a reputation for lending money to individuals and corporate entities that may have not been entirely above board. The industry has cleaned up and we as a company will only take on reputable people.”

Private funding may also be possible. Each has their own measures and standards over a firm’s investability. However, Fell points out: “One word of warning. We have seen clients get into trouble and go looking for a white knight. They need to be wary of people just seeking information on consultants and clients, and pulling out at the last minute in the hope you sell up so they can pick you up for a song. Never be single-sourced for an exit strategy.”

But meeting initial reservations over funding doesn’t have to mean the door is slammed in your face, because there are things recruiters can do to make them more attractive investment propositions. Firstly, it’s worth looking at the team in place. Saunders says: “One of the early questions is about the management and directors; are they the same? What’s our experience of them? If they are an existing client we have more knowledge of their competence and we can decide if they are competent enough for us to support. If there’s an incoming director it may also influence our decision one way or another.”

Simkins adds: “When a company is seeking new finance, we need to make sure something has changed within the company, such as new management, because we don’t want to end up doing the same thing down the line.”

Fern has a list of interim managers he places with distressed companies. He says: “We have people in finance, operations, sales and marketing; you name it. By bringing them in, we hopefully demonstrate to the lender that they have the skills to run the business.”

It also pays to look at your clients. Fell says: “We suggest they look closely at protecting the firm from bad debts in future and run risk analysis on debtors. It’s an opportunity to talk to them about how they assess risk. They don’t want to do low-margin business with high-risk companies. You balance risk against the reward.” Simkins adds: “We take references from credit reference agencies and report our bad experiences to them. It keeps everyone honest.”

And for extra security, lenders recommend insurance. Saunders says: “If we thought we could improve risk for ourselves and our clients, especially when they have a couple of prime accounts, we would encourage the client to insure.”

Funding is also more likely to be forthcoming if the process is tackled correctly. Fell says: “Where they are an existing client, we are in a position to speak to them early in the process and put them in touch with the right financiers who understand recruiters and phoenixing. With a new client, if they already have an insolvency practitioner who is not used to dealing with recruiters it can cause some problems.”

Saunders highlights that the key is continuity: “If consultants or clients get a whiff of a problem, the business is dead. It’s vital to maintain continuity. Ideally there is continuity of payroll from one week to the next.”

And for that to happen not only does it take the right experts, it also takes planning, and for the company to act when it needs to. Saunders says: “What tends to happen is the company gets into denial. They don’t have the conversations they should be having with financiers and the Revenue, and then it becomes a panic. The advice would always be if you’re starting to get stretched, talk to your financial provider earlier. If there is no way forward, get good advice from an insolvency practitioner and you could preserve some value in the business.”