A Guide on How to Start a Staffing Agency
With the tepid growth in almost every sector of the US economy, there is one area with historically solid growth: the staffing industry. All private, public and government entities of every size experience uneven and peak workload that requires additional personnel to get the job done. In addition, many entities cannot or do not want to add to their legacy costs and liabilities with the addition of more full-time employees and look to staffing agencies to fill their workforce needs. Demand for information on how to start a staffing agency has never been higher.
Solving these issues by providing high-quality temporary or full-time workers and understanding the needs of these companies creates the need for start-up staffing agencies. Paragon has created this guide on how to start a staffing company to help entrepreneurs on their journey through business ownership.
What Do I Need to Get Started?
Even though the staffing industry is saturated with what seems like a temporary agency for every type of industry, job and needs you could imagine, perplexingly the market for qualified and dependable people many times still goes unfulfilled. To increase your odds of being successful in this space, you need a clear game plan written out in advance. Reality and execution might vary considerably from your plans, and defining the relevant variables before you launch, is essential.
Variables to Plan for when Starting a Staffing Company:
What is my Background?
Create a Weekly Cash Flow Budget
For example, you are billing $20,000 per week (to start), and you have forecasted a 9% net profit. In addition, your large customers take an average of 42 days (6 weeks) to pay you. That means you will need 91% (100-9%) just to cover your costs. Not all the 91% or $109,200 ($18,200 x 6 weeks) is to be paid over the next 6 weeks, but a high enough percentage is going out so that you better have the working capital or make arrangements with a staffing payroll funder. This example is based on zero growth. If you quickly grow from $20,000 to $30,000 per week in sales, then your working capital needs just went up another $55,000!
Since Paragon is a staffing finance company, we will talk much more about this at the end of this paper and how you can use our advance payroll funding to receive 90% each week against your billing to cover the vast majority (99%) of your costs.
What is My Niche?
For that reason, you MUST have a target market. You will be able to land higher-quality clients, and it will grant you the flexibility to say ‘no’ to vacancies that do not fit your niche. You should have deep expertise in your niche and choose a market that will keep your company profitable over an extended period.
They key is specificity and locality. Paragon, for example, has broad IT and nurse staffing financing, guard service funding and credit protection experience. We also target sales of staffing-related services to every level of government where many AR funding companies shy away from financing government sales and the subsequent created government accounts receivable. Teacher staffing company factoring is a relatively new niche with the growth in charter schools.
How do you become knowledgeable in a niche? A great thing about our Internet Age is that you can quickly research your larger, successful competitors, then emulate what they do well and improve upon their weak points. With the proper research, drive and knowledge you can quickly become the best in class with your specific offering.
Whom Can I Get on My Team?
Legal Advice & Counsel
Importantly, where you incorporate your company and the state(s) you derive your sales from is another big decision you need to research and make.
A friend of Paragon and veteran staffing industry attorney, Diane Geller makes the valid point “The worst states for legal locations are in the West and Northeast, where lawmakers commonly consider regulations to be tools for social change and, consequently, administrators find compliance difficult for staffing firms. More likely in these areas than in other parts of the country, judges tend to certify cases for trial that wouldn’t pass otherwise.”
Geller goes on to say “Some states prohibit non-competes by statute and then there are states like New York, where enforcement requires a narrowly tailored agreement, so employers usually pay employees not to play.”
Liability Insurance & Workman’s Compensation
The proper job coding and classification of your employees is critical. Do not be tempted to classify warehouse personnel as clerical to falsely improve your gross margins. This has been seen as a criminal action by company owner(s) in some jurisdictions.
However, you might be targeting an industry where you customers and hires never visit you or you need easy access with plenty of parking for your hires. Try and keep the rent cost to a minimum by choosing a “B or C” location as high fixed costs are to be avoided.
Software to Manage Your People & Clients
How are you set for training and the ability to quickly ascertain your new hires skill sets for specific jobs? A great service and selling feature is the ability for your hires to hit the ground running versus weeks of low productivity. For example, a new hire might be at 33% efficiency for entering data or telemarketing. It can take 2-4 weeks to get that person to 100% productivity. What tools do you have in place to both measure current and growing skill aptitude? A solid talent acquisition, training, and retention strategy will separate you from the pack.
Note: Everything else will be easier when all the above criteria are researched and met.
Next: How to Quickly Grow Your Staffing Company Above the Break-Even Point
You have made the decision to start a staffing agency that will quickly (hopefully) be very profitable, fund your lifestyle and in the future fund your retirement on its sale. You have a chosen staffing niche where your clients can retain through you temporary workers during busy periods, emergency situations where a full-time worker needs to be replaced or even permanent workers supplied by you to reduce your client’s legacy employee costs.
You have your perfect office space picked out, and hired personnel who will provide great value to your customers. However, there is just one problem with this entire situation: Your staffing agency has the startup capital for 25-30 days of operation, but your largest customers won’t pay your invoices for 45-60 days.
How will you fund 6-8 weeks of payroll when your people want to be paid at very the minimum bi-weekly? You cannot think about payroll processing, people scheduling or an invoicing system if there is no money to cover more than 1-2 weeks of payroll!
What are my Working Capital Options?
1. A Line of Credit from the Local Bank?
- Start-Up Friendly
- Open to New Borrowers with High Customer Concentration
- Lending to those with Bruised Personal Credit
- Making loans to a business without two years of tax returns & YTD Financials with all showing good cash flow and debt coverage
Well, since you are a start-up with only one customer (at first) and losing money for at least the first few months; a regulated bank is probably not going to be the answer to your working capital needs via a staffing loan or temp agency lending when you start your staffing business.
2. Staffing & Payroll Funding from an Invoice Factoring Company?
Non-recourse invoice factoring provides businesses cash flow by selling client invoices due in the future to a third-party factor. The company receives up to 90% of the net invoice amount immediately versus waiting extended periods of time to receive payment from their client. In exchange for the service, the AR funder receives a time-based fee to cover the Working Capital, AR Management, and Credit Protection Services that they are providing.
The fees can be very reasonable (considering they include Working Capital, Credit Protection & AR Management) and are flexible depending on your individual circumstances and will decrease as your factored volume increases. Fees can run from 1.25-2.5% per 30 days including all the services and the cost can flex down as your volume grows.
Although invoice factoring can be a wonderful source of cash flow for staffing agencies, there are few things that you should research about the staffing factoring company you work with:
- Research if the factoring company has a minimum invoice amount per month to finance your transactions. Paragon’s typical clients have sales of $25,000-$2,000,000 per month. However, we can deal with a staffing company in its early months as it grows to $25,000+ in monthly sales. More importantly, if you don’t think you can get to $30,000+ in monthly sales relatively soon, you won’t make much of an income. You want to create a company and just not a job for yourself.
- Some Factors might have a minimum or maximum total amount of invoices when you request funding. Some also have time limits on invoice terms, anywhere from 60-90 days. With Paragon’s Credit Protection and Non-Recourse Programs, this is not an issue for you or us.
- Many staffing factoring companies cannot deal with any outstanding legal or tax problems on yourself or your business. At Paragon Financial, with 22 years of taxing authority experience, we often work through legal and tax issues to get you funded and have worked with taxing authorities to subordinate their position to Paragon.
- Most importantly, does the factor have broad experience in your chosen staffing niche? For example, if you need teacher staffing company financing do they have experience with that specific industry and class of clients. You can’t trust neophytes with the responsibility of your cash flow, credit, and AR management. The care and handling of your customers is critical too. You will enjoy Paragon’s famous “soft touch” with your clientele.
How Does Invoice Factoring Help Temp Staffing Agencies?
YOU also control how the advanced funds are used. The great thing about an invoice factoring company paying you for your invoices, is that they do not have an influence on your purchases besides making payroll, paying taxes and insurance with the monies advanced to you on a timely basis. Rather than having to wait for approval by a lender before making any growth-based decision, you can spend on what you need and expand your company at the rate that you choose. Just be careful and watch your gross margins closely.
Fast Unlimited Working Capital
Ease of Qualification
We hope this short guide on starting a staffing company has been helpful. We want to be your trusted resource and are excited to be with you from the beginning to the successful ending of your entrepreneurial journey. Good Luck!