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Getting to grips with the EFA's payment policy

Alex Fenton, CEO and founder of alternative finance provider, GapCap, discusses the Education Funding Agency

Posted by Lucinda Reid | March 26, 2017 | Law, finance, HR

The UK government gives out billions of pounds in funding to the education sector every year, a fund source much-relied upon by providers of learning in the industry. But when it takes the Education Funding Agency - one of the main pillars of the government’s funding apparatus - a year or more to pay up this gift can become a curse. For the companies providing vital education and training to young people, especially smaller companies, receiving payment for services you provided a year ago can cause some serious cash flow problems.

The Education Funding Agency (EFA) allocates funds to those offering traineeships, including colleges, providers, schools and academies. It’s a vital service but it only allocates its funding annually; not because invoices take a year to clear but because the EFA’s system effectively defers the raising of invoices until nearly a year has passed.

For education businesses, this kind of delay in payment can cause serious problems: nearly three in five businesses in the UK have suspended work and services to combat late payment, whilst almost a third (30%) of businesses are being forced to borrow more. Given the government’s recent public statements around tackling late payments, including the impending appointment of a Small Business Commissioner whose role it will be to tackle this very issue, it seems ridiculous that the government would take so long to repay businesses providing vital education. Moreover, the Skills Funding Agency (SFA), another government body, takes just six months to pay out allocated funding – half that of the EFA. So, why the discrepancy?

The EFA claims that the reason it delays raising invoices for a year is to ensure that payments are made on time. With nearly 100% of invoices paid after a year, this is a fair claim. But the question remains: why does the EFA need a year to issue payment when the SFA, a similar government body, takes just six months? After all, twelve months is an unusually long time to take to issue funds when that is its singular purpose.

My concern is that these lengthy payment terms will cause serious problems to providers of learning, and that the education and training that young people rely on will become limited as the only businesses able to provide it will be large well-established bodies who are less affected by cash flow issues. For those just trying to start out in the education industry, or indeed any of those who can’t afford to plug the cash flow gap with extra funds, payment not arriving for a year is no small matter.

So, what can you do as an educator to mitigate the problems caused by the EFA’s strange policy?

Of course, the first and most important thing is to be aware of it and plan ahead. Businesses should be conscious that, having provided their services, their funding may still take some time to materialise. So, good financial planning and forecasting is essential. Consider all potential cash flow risks and create recovery plans: risk management is an excellent way of preventing cash flow issues. Similarly, be sure to create a cash-flow forecast that predicts monthly costs, thereby allowing you to see the financial situation of your business in real time.

In order to plug the gap and maintain a healthy cash flow, education businesses might also consider alternative finance solutions. Selective invoice finance allows businesses to raise cash against their invoices in 24 hours, be it regularly or just as a one-off. In this way, companies can release cash much faster than it would usually be delivered to them, enabling them to continue to provide vital schooling, despite it taking a year to receive your funds.

On average, invoices are paid 22.5 days beyond agreed terms. The government has been very vocal about tackling this important issue yet it is as, if not more, guilty of causing late payments as the kingpins of ‘big business’ that it so openly criticises. We all know how important the education sector is, and the government should be doing all it can to speed up paying out to help grow the sector. For this reason, it is important that the education sector make its voice heard and is not afraid to ask the hard questions.

To find out more about GapCap, visit their website

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