How Factoring Companies Help Staffing Agencies
It is not uncommon for staffing agencies to experience working capital challenges, especially with weekly payroll. Invoices can take up to 90 days to be paid, all the while you still have to pay your staffing payroll on time. Whether you specialize in short and long-term temp work, or professional recruiting, there are going to be times when the amount of cash coming in is not able to cover what has to go out. These issues are relevant no matter what industry your staffing firm represents from janitorial to nursing, to security guards to teachers.
What Mistakes Do Staffing Agencies Make to Gain Working Capital?
It’s understandable to grow frustrated about the lack of cash and payroll funding for your temporary agency, especially when you are gazing at a stack of unpaid invoices. This could lead to you instilling practices that will eventually stunt your agency’s growth:
- Adding excessive late fees to any client who pays you after 30 days
- Making late payments on your operating costs
- Not meeting payroll and paying your employees on time
- Being overly aggressive in your collection techniques
- Only providing staffing for clients who promise to pay invoices within 30 days
These strategies might be useful for increasing cash flow short-term but is not a good way to keep clients. Over time, they will look elsewhere for their staffing needs, and your staffing talent will find a firm that pays on time. Not paying your overhead costs on time will affect your credit, and the ability to get financing in the future. What solutions are there to meet your financial obligations?
How About a Business Loan for Working Capital?
One solution is to ask a bank or other lender for a working capital loan. This option takes up a good deal of your time, and you will have to provide the bank with stacks of paperwork. Your business credit is scrutinized, and you could be asked to present a business plan for the future of your staffing agency. Most likely, your company will be not be approved after going through a circus act to even be reviewed by the bank.
Even if you make it through the application process and get approved for the loan, you have to commit to making monthly payments to absolve the debt. This only exacerbates the issue of having to wait 60 days to get your hands on the cash from an unpaid invoice. A straight business loan is useful in some situations, but not helpful for the structure of a temp agency.
How Do Factoring Companies Help Staffing Agencies?
The complicated structure of staffing firms makes working with a factoring company ideal. They are payroll funding experts and are used to working in complex funding situations. Your largest assets lie in your staffing talent and the invoices that they have generated. Factoring companies are able to leverage these unpaid invoices as a type of collateral for securing the financing your agency needs to meet its weekly financial obligations.
A Factor gives you cash for unpaid invoices up front. This funding type is not a loan so you will not be subject to any form of interest on the money advanced to you. Non-recourse invoice factoring gives you the flexibility to get the cash you need immediately in the way you need it. You can choose which invoices to hand over to the lender, and on which you can wait to receive payment. The invoices signed over become the responsibility of the factoring company for management and collection. Factoring companies have deep experience working with a soft-touch and representing the interests of all parties involved. Staffing firms do not need to worry about a heavy-handed, uncaring ‘collection agency’ mentality. If you have a non-recourse contract, then even if the client does not pay, in many cases you are not required to pay the factoring company back.
Is There a Downside to Factoring for the Staffing Agency?
A factoring company will research the credit history of your clients before accepting an invoice, especially if they are offering a non-recourse solution. This could lead to them declining certain customers, or charging you a higher fee for taking their invoices. The flip side to this is that the factoring company can help you determine the creditworthiness of your business clients, and might even make recommendations to you for who to work within the future.
A staffing agency is much easier to manage once you resolve the cash flow issue. Without having to worry about when your clients will pay, and how you will meet weekly payroll. You can devote more time towards recruiting qualified talent, keeping up new industry regulations and pitching selling the perfect talent to new customers.