Does Factoring Work for the Temporary Staffing Industry?Posted by Factor Funding Co. on November 3, 2015
The answer is yes. Factoring is a good match for the temporary staffing industry. It can help smaller agencies free up necessary cash to grow and take on new business.
The Reality of a Small Temporary Staff Agency
Temporary staffing agencies are caught in a vicious cycle.
- They are in the business of providing temporary staff to other companies.
- They send employees in to do a job for a client company.
- They invoice that client for the hours the employees worked.
- The client has between 30 and 60 days to pay the invoice.
- In the meantime, the employees who did the work for that client need to be paid.
- The agency must have enough money to cover payroll.
Hence the problem. Cash flows can suffer between the time the work is done and the time the client pays for that work.
Staffing agencies need large cash reserves or constant cash flow to meet their obligations while waiting for that client payment. It causes a vicious cycle that makes it very difficult for smaller agencies to grow. They cannot take on too many new clients without facing a cash flow shortage when payroll is due
How Factoring Can Help
Factoring helps free up cash that a company has tied up in outstanding invoices. The freed-up cash can be used for just about anything. Including meeting the payroll of a temporary staffing agency.
If a staffing agency wants to free up cash, the first step is to establish a relationship with a factoring agency. The factor will review the staffing agency's client list and open invoices. The factor wants to know that the clients have good credit and that the volume and amounts of invoices is sufficient for factoring. Once this is approved, the relationship is established
The act of factoring is relatively easy from the staffing agency's side. They send in their open invoices as well as copies of the employee time sheets. The factor reviews and verifies the invoices are valid. If everything checks out, within 24 to 48 hours of submission, the factor forwards up to 90% of the face value of the invoices. Once the client pays the invoices (in 30 to 60 days), the factor forwards the remaining value of the invoices, minus their factoring fee, which usually ranges from 3 to 5 percent.
This makes cash flows very easy to manage. And it makes it possible for a temporary staffing agency to take on more and bigger clients.
More Than Payroll
Factoring can help a temporary staffing agency meet more than its payroll.
There are other upfront costs involved with growing a staffing agency. There are advertising costs to attract new clients as well as new staff members. Screening new employees and getting them ready for upcoming positions are additional costs the agency bears. This is on top of business costs like rent and utilities. These costs can add up quickly, especially if there is no cash available to handle them. Factoring frees up the cash.
No Need to Wait and Everyone Wins
Getting a bank loan takes time and excellent credit. For a small temporary staffing agency, getting such a loan can be very difficult and time-consuming. If the agency has an opportunity to take on more clients, waiting on a bank loan is just not feasible. The clients are going to move on and find another temp agency. Factoring can happen within a week the first time. There is no wait involved.
- The temp agency doesn't need to wait for financing before taking the next step in growth.
- The agency's staff members don't have to wait to get paid.
- The clients don't have to wait to get their staffing needs met.
Everyone wins. How can you use factoring to help your temporary staffing agency win?