Cracks in labour markets pose risks to UK recruiters’ funding

Declining trading revenues for sector-specialist recruitment firms pose new risks for funders providing invoice discounting facilities while indicating fresh labour market softness across pockets of the UK economy. Sector-specialist recruitment firms serve as a useful proxy for employment trends, as their revenues are tied to successful new job placements.

In recent months, our team has learned of declining demand for new vacancies in two notable sectors: hospitality, including bars, restaurants, and nightclubs, and technology roles within telecommunication companies, such as mobile phone and broadband providers. Both sectors have reported a fall-off in the demand outlook for their products and services, prompting companies to scale back recruitment and capital expenditure relative to prior years. In some cases, job cuts may be necessary.

Hospitality struggles impact specialist recruiters

Tough conditions for hospitality groups have squeezed margins due to rising costs and faltering consumer demand, as customers rein in spending amid the cost of living crisis. The case of Revolution Bars, the AIM-listed leisure group, exemplifies the cascading consequences of dwindling trading revenues on a business’s sustainability.

Revolution Bars, which operates Revolución de Cuba and Peach Pub, has raised £12.5m in emergency funding from investors to finance a restructuring plan that will close around a quarter of its 80 venues across the UK. The group is grappling with rising costs and a downturn in trading. Its stock has slumped by nearly 75% over the last 12 months, and shares were suspended in early April after it failed to publish its results. The company cited the disproportionate effect of the cost of living crisis among its target demographic, changing behaviour trends, and the impact of business rates and national living wage increases.

Revolution is not the only hospitality group facing difficulties. Stonegate Pub Company, one of the UK’s largest pub and bar groups, warned in April about its uncertain future due to difficulties in refinancing its £2.2bn debt pile amid elevated interest rates. Whitbread is laying off about 1,500 jobs as part of a plan to convert its struggling restaurants into hotel rooms. The company, which owns Premier Inn hotels and 821 restaurants including Beefeater and Brewers Fayre, reported a downturn in its food and drink business. In April, UK specialist retailer Majestic Wine purchased Vagabond Wines out of administration a month earlier due to “a legacy of Covid debts”.

Technology roles within telecommunications

There has also been a noticeable slowdown in the demand for technology roles within telecommunication companies. Firms are scaling back on recruitment efforts in response to changing market dynamics. For instance, BT and Vodafone have both announced substantial job cuts to simplify their business. BT is on course to shed 55,000 jobs by the end of the decade, with up to 20% in customer services as staff are replaced by artificial intelligence (AI). This decline in demand underscores an emerging weakness in the labour market, as intense competition and automation become ever-larger catalysts for job cuts. More broadly, rapid technological changes required in this sector spur the need for investment that strains financial resources and shifts the focus away from recruitment.

At a macro level, if this labour market softening broadens out across the economy it could indicate a reversal of a three-year trend of labour demand exceeding supply. According to the Bank of England, vacancies have fallen back close to pre-pandemic levels, with labour demand and supply now roughly equal. This should translate into less upward pressure on wages.

Cascading impact on recruitment company funders

The ongoing challenges in the hospitality sector are reverberating through the recruitment industry where specialist recruiters count bars, restaurants and leisure venues as key clients. Invoice discount funders, who have traditionally favoured lending to recruitment firms due to their transparent accounting trail, must now more closely scrutinise their borrowers’ cash flows. In the current climate, it is crucial for funders to thoroughly assess their clients’ liabilities and trading patterns to identify borrowers who may be over-leveraged post-pandemic with multiple credit lines, such as overdraft limits, overdue PAYE and VAT liabilities to HMRC, and other working capital constraints.

Recruitment firms typically rely on invoice discounting to bridge the gap between placing a candidate and receiving payment from the client company. This funding allows recruiters to maintain cash flow by borrowing against unpaid invoices. However, a slowdown in recruitment activity – evident in sectors like hospitality and telecoms – means fewer invoices are raised. This directly impacts the cash flow of recruitment firms, potentially hindering their ability to repay loans. In a market where recruiters’ turnover is declining but operational costs (e.g. debt servicing, wages, property costs) remain elevated, the capacity for working capital can become severely squeezed. This scenario poses significant risks for both recruiters and their funders.

Proactive measures for funders and recruiters

BTG Advisory is well placed to help both funders and their recruitment borrowers. Our team can provide an independent assessment of a client’s financial sustainability amid a trading slowdown. These assessments can offer insights into the probable duration of market weakness and the options available to the recruiter for cost-cutting and cash-raising. Funders need to initiate early conversations with their recruitment borrowers to understand how they plan to adapt to the trading slowdown. This proactive approach allows funders to offer support and solutions before financial pressures become unmanageable. It is essential for funders to closely examine their clients’ financial health, including liabilities, credit lines, and outstanding tax obligations. Identifying over-leveraged clients early can help to mitigate risks.

There are several strategic measures open for struggling recruitment firms, including cost reductions, debt restructuring, and improvements in operational efficiencies. Firms may need to consider measures such as reducing workforce size, downsizing property lease footprints, and other cost-cutting strategies to align with reduced turnover (e.g. renegotiating terms with suppliers and landlords to reduce ongoing costs). Selling non-essential company assets (e.g. commercial premises) can also help bridge short-term financial gaps.

Conclusion

The current economic environment presents significant challenges for the recruitment sector. Funders must stay vigilant, engaging with clients early and frequently to understand their financial position and adapt lending strategies accordingly. Proactive engagement by funders and strategic financial management is essential to mitigate risks and ensure long-term stability. Funders must remain agile and ready to adjust their approach in response to evolving market conditions and emerging client difficulties