Speaking to lenders, no one quite knows what’s going to happen next with the new umbrella company legislation, but it’s worrying all the same – and uncertainty affects funding decisions across the recruitment finance market.
Over the last few weeks, I’ve spoken to multiple invoice finance providers and banks about the issue, and the mood has definitely changed. Credit teams are nervous, underwriting is tightening and lenders who previously understood the recruitment finance market are suddenly becoming far more cautious about the sector. Recruitment makes up a huge percentage of many lenders’ existing books, particularly in invoice finance. Historically, it was seen as attractive lending because the debtor books were usually clean, timesheets supported the invoices, and the cash flow model suited invoice finance perfectly. But lenders are starting to look at those same books differently.
It’s not about whether the end customer pays the invoice, it’s whether there could be tax exposure somewhere behind the payroll structure if an umbrella company fails – which materially changes things. But nobody fully knows yet how the legislation will play out in practice because there haven’t been any real test cases. As a result, the market is operating in a strange place where fear and uncertainty are filling the gaps before there’s any legal clarity – and whenever uncertainty appears in finance markets, people start becoming defensive.
I’ve noticed that credit teams are being invited to attend seminars run by insolvency practitioners, lenders are stress-testing their exposure and everyone’s trying to work out where liability could ultimately sit if things go wrong. Caution is sensible, but some of it’s also starting to create some confusion.
A major construction business went under recently and conversations immediately started around reduced credit appetite, pressure on funding lines and concerns about wider supply chain exposure. Once lenders become nervous about one part of the market, they often start applying broader restrictions elsewhere.
Recruitment businesses are particularly vulnerable to that reaction because many have very few hard assets. In most cases, the debtor book is the business’s main asset, which is why invoice finance has traditionally worked so well for the sector, but recruitment businesses can often be relatively easy to shut down and restart under a new entity. Where poor operators exist, phoenix-style behaviour has historically been a genuine issue, particularly where tax liabilities are involved and HMRC clearly wants to stop that cycle continuing.
Again, that concern is understandable.
The problem is that many lenders still don’t properly understand the operational differences between PAYE models, umbrella arrangements and CIS contractor structures. They all carry different risks, different compliance considerations and different levels of exposure – but they’re being viewed through the same lens.
It creates a dangerous situation where good recruitment businesses become harder to fund simply because the market around them has become more uncertain.
In parallel, the mainstream banks have already stepped away from a lot of smaller business lending in the recruitment sector, particularly below the £2m turnover level, which means recruiters already have fewer funding options available than they did a few years ago.
So when specialist lenders start tightening as well, businesses can suddenly find themselves with very limited room to manoeuvre.
The irony is that the strongest recruitment businesses are usually the ones most willing to open the bonnet of their organisation and explain exactly how their structure works. They understand their payroll model, they know where the liabilities are, they work with compliant providers and they’re prepared to answer difficult questions properly. Those businesses shouldn’t automatically become casualties of wider market panic – but that feels like the danger now.
The recruitment finance market isn’t collapsing, but it is becoming noticeably more nervous, and when lenders get nervous, funding decisions become broader and far more cautious than they should be. Get in touch if you have any questions.
