Funding a Recruitment Start Up

Congratulations on making the decision to start your own business or surviving as an early stage, emerging business. Recruitment companies both permanent and temporary require cash flow; it’s the oil of your engine. Here we explore some of the myths, the facts and jargon you need to be aware of when looking at funding your early stage business.

If you're considering setting up on your own be aware of the following:

• It will be lonely and tough, at times but it will also be incredibly exhilarating
• It will need more cash than you think but you won't have to break the bank
• You won't have the backup and support on Marketing, HR, Accounting, IT or even a personal assistant (That's you!)  and you will need stamina, so pace yourself
• A gamut of providers of services will clamour for your cash so become a procurement professional not just a sales professional.
• To build a business that you can be proud of and worth a fortune it will energise, reward and frustrate you in equal measure 
• Doing battle with prior employers will slow you down if poaching former colleagues or getting around non compete clauses

 Fact: The recruitment profession has multiple examples of firms that started in back bedrooms or with external funding. Sadly far too many well-meaning recruitment start-ups fail in the early stages for a number of reasons such as:

• Lack of capital or the opposite of taking on too much debt
• Giving away equity cheaply leading to shareholder disagreements
• A Business Plan that wasn't viable or tested
• Lack of focus, doing too much, or in some, not doing enough. 

You wont necessarily know what you need in funding at the outset which is why sensible business planning and almost pessimistic cash flow forecast help you see what you can afford, what you can do and what is beyond your reach or where you may need additional funding.

For funding your SME or start up there's a range of options to start or grow your business, each with their own benefits and pitfalls.

Self-funding: If your business plan shows that you can afford your living expenses and your investment in the start up, then this is by far the optimal position as you retain control, you own your equity and you do things your way. Having someone who can act as your mentor, guide, your "critical friend" providing advice, guidance and council often helps. Getting experienced advice from someone who's "been there, done it" helps of course and they should have your best interests in mind, many won't demand a chunk of your equity that lumbers you with a shareholder who you don't need later on. 

Early Stage Equity Investment – Seed Funding: A range of providers provides this investment. This type of funding flatters you – but ask yourself if you really absolutely need the investment as often your own cash will be used first and your backer may not need to invest their full amount, especially if the business starts strongly. Some also load your business with on-going "management fees" often worth 2 or more additional staff, slowing your potential.

Giving equity should not just be a binary financial decision; any investor must bring you something additional to cash be it coaching, ideas, systems and on-going support.

That said, many well known firms have been started this way and the recruitment entrepreneurs themselves were invariably well known and had a track record well before they obtained this type of backing. It very much depends on your plan, your achievements and the segment you are focusing on to obtain backing. Strong relationships with potential funders or investors are paramount  

You will be required to put a degree of funding in personally, either from a salary sacrifice, reduced salary for a period, less draw of profits and some pass the risk onto your assets, often your house. Key to any backer or funder is risk. Every investment comes with a degree of risk. 

Some owners find out too late that they don't have the same share structure as their backers or that they are "hostage to fortune". Some start-up business owners have fallen prey to those who promised the funding but which then never materialises or see forced marriages to other businesses in the backer's stable - hence knowing who owns the "control" in the equity is key, doing your due diligence and speaking to prior and current owners.

That said, with the right backer, many have started, grown and profited from businesses they have created with someone else's funding. If this is an avenue you think you want to consider or if you get approached, get qualified professional advice to represent your interests and ensure any agreement and its terms are fair given the risks.

Crowd Funding: There's been a lot of noise and many successes in many business sectors of this way of funding. Because it's relatively new doesn't mean its wrong and the converse is equally valid.

It’s invariably used where the entrepreneur has less initial capital than is needed so looks to syndicate the funding to friends, family, angel investors and others. It's often simpler and quicker where funding can be found allowing you to get on with your business. By putting less of you're "skin in the game" entrepreneurs could lose touch with disparate shareholders. Investors should help you increase your network, clients, candidates, staff, and road testing you plans and ideas. A real investor should be activist to a degree and crowd funding makes it difficult and often prevents business owners from tapping into the knowledge of people who really know your sector's nuances.

Crowd funding fractures your equity base. There's little control and its a minor investment for many given the small stakes the investors get - so ask if they are as interested in the business as you are and if things didn't quite go to plan, would they be there for help or advice? With multiple investors could you every get consensus for decisions?

Venture Capital Finance & Private Equity: Venture capitalists, on the other hand, typically pool money from different sources and generally invest in later-stage companies that have already established stability and success. They typically look for businesses with greater requirements than most start ups or SMEs need and are less geared for start-ups.

Angel Investment: Angel investors often invest in start-ups, which are unable to get financing from alternative sources such as venture capital or private equity institutions, including in some cases banks.

Angels seek a different return for their investment based on the returns the sector normally gets. Most early-stage ventures require small amounts of money, typically less than £200k with Angels providing this in small parcels to small firms to mitigate risk. As with any investment getting knowledgeable advice is critical. Be aware of leaving a lot of the value you create in the hands of someone who helped at the beginning but didn't do much once the business was established.

Factoring & Invoice Discounting: The major banks and traditional factoring firms are just not interested in factoring 1 to 25 contractors which has led to many recruitment owners to curtail their ambitions in contracting and temp businesses. Thankfully today there a many new entrants in the factoring arena designed for SMEs and start ups and its to be applauded for those who have filled this void. It is not cheap but helping you finance 1 contractor and up to the level where a mainstream bank is interested in taking on your book, the market now has many providers for SMEs and start ups.

Negotiation: Never accept whatever the provider tells you. You're dealing with highly astute commercial people looking to improve their bottom line, not yours. Paying 1% above base rate (often a lot higher) could make the difference between you hiring a couple more people to grow your business so put the time in to negotiate. Invariably you were cosseted by the corporate apparatus of your last employer and naturally you are more sales than procurement in mind-set. Get help and hone your skills to never accept full price on the latest gizmo or software.

Bank and other loans: Whilst the banks may appear to be "closed for business" as far as loans are concerned they are very much open for the right combination of personality, business plan, sector metrics and prospects. The major banks and the new banking entrants are advancing funds to start ups and often they can allow you to access the Enterprise Financial Guarantee better known as it predecessor the Small Firms Loans Guarantee Scheme and so it is worth taking you bank manager out to lunch and working on the relationship.

The Cost: With any investment or funding source, you will need to know the terms, when repayments will be made, what management fees are expected, what interest will be applied, what management control will the investor require and of course - when do they want a return and at what rate. There is no "one size fits all" so consider your options carefully. Its worth reiterating that some of the largest businesses in recruitment and in wider commerce and industry many of the most admired and profitable businesses started with one person, one credit card, no dog and a lot of guts!

Finally, whichever route you take, don’t forget you are missing all the benefits of the back office functions you had in employment from Accounting, HR, Marketing, Compliance, Procurement and leadership development. Having buddy, a tame advisor to help you navigate your way ahead can make the difference between being a great business or a nearly ran.

Whichever route you embark on, take time to assess your options carefully and most equally importantly take time out to enjoy yourself lest it become a "job". 

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