A growing economy lifts all boats, but staffing companies, in particular, can thrive on the increasing demand by companies to outsource their hiring. However, as with any type of business that experiences spikes in customer demand, staffing companies are prone to capital shortfalls, which can hinder their ability to grow.
Payroll funding for staff can be especially challenging for staffing companies that often have to wait up to 60 days for payment from a new customer while having to pay salaries, employment taxes and other expenses associated with adding staff. If they don’t have enough working capital, they can’t afford to take on new customers, making it difficult to grow their business.
So, where does a growing staffing company turn to keep working capital flowing while adding new customers? Traditional bank financing is typically out of the question for any business without established credit or assets and more predictable cash flow. For many small businesses, taking on debt is not a practical solution anyway. But, until they have the time to build up a cash reserve of their own, staffing companies need a reliable source of payroll funding for staff.
What is Staffing Factoring?
Staffing factoring, also known as payroll funding, is a kind of alternative financing specifically built for staffing companies that converts their outstanding invoices into cash immediately. It prevents them from having to wait for their customers to pay invoices, boosting working capital that’s necessary for growth and stability.
How Payroll Factoring Works
When a staffing agency submits an invoice to its customer, it can turn around and sell that unpaid invoice to a payroll funding (or factoring) company. The payroll factoring company advances up to 90% of the invoice amount to the agency immediately, then assumes responsibility for collecting on the invoice from the end customer. Once the customer pays the invoice, the payroll funding company releases the remaining 10% to the agency, minus a small fee.
Staffing agencies can submit invoices in bulk, or one at a time. Before the staffing factoring company will fund an invoice, they must perform due diligence, verifying that the invoice is legitimate and the end customer is reliable through things like credit checks and payment history. If not all invoices or customers meet the requirements, the financing company may choose to only fund some of them.
A Quick Step-by-Step Look into the Staffing Factoring Process
There are four simple steps to payroll factoring. We’ll outline them briefly here, but you can find more details by navigating to our full guide on payroll funding.
Step 1: Providing Services to Your Customers
The staffing company performs services for its customers as usual. One of the many benefits of payroll funding is that it does not interrupt or change the way you do business.
Step 2: Billing Your Customers
The staffing company invoices the customer in the same way it typically would. The only difference is that it amends its payment instructions to remit payment to a lock box or bank account held by the payroll factoring provider.
Step 3: Selling Your Invoices
The staffing company presents the invoice to the payroll factoring provider for purchase. After purchase, the provider advances up to 90% of the invoice amount to the staffing company within 12-48 hours depending on the need. The remaining 10% of the invoice face value is placed in what is known as a “reserve account.”
Step 4: Collecting the Remaining Amount
Once the customer pays the invoice directly to the payroll factoring provider, the remaining 10% is released from the “reserve account” to the staffing company, minus the provider’s fee (typically 1-5%). This is referred to as a “reserve disbursement.”
Why Payroll Factoring is Ideal for Staffing Companies
Staffing firms thrive on the demand of other businesses looking to outsource their hiring. However, when the company places an employee with a customer, it can take anywhere from two weeks to three months for them to receive payment for that placement.
For staffing or temp agencies that place contracted workers with their customers, they must wait anywhere from 30-90 days for their invoices to be paid. In the meantime, the agency still must make payroll for their employees. That can create a significant cash shortage while they wait on outstanding invoices.
Because businesses in the staffing industry often have limited operating history or few hard assets like office buildings and large equipment to borrow against, traditional financing is not always accessible. Beyond that, bank loans can take a long time to come through, resulting in further delays when there’s not enough working capital to bridge the gap.
What Types of Staffing Companies is Payroll Factoring Right For?
There are staffing companies that focus on nearly every services industry. Each kind operates similarly and experiences the same problems, resulting in a lack of working capital while they wait on invoices to be paid. Here are just a few kinds of staffing companies that are a great fit for factoring:
- IT (Information Technology) Staffing
- Healthcare Staffing
- Light Industrial Staffing
- Administrative Staffing
- Hospitality Staffing
- Event Staffing
- Security Staffing
- Professional Services Staffing
- Oil and Gas Staffing
- Trucking/Transportation Staffing
- General Staffing Agencies