Payroll is due in a couple of days. Do you have the funds to cover it? That is a common dilemma for many smaller staffing companies. They need to pay their employees a week or two after they complete work at the client company. But, the client is not going to pay the invoices for at least a month. This makes cash crunches quite common for staffing agencies.
Fortunately, there is a solution that will solve the cash crunch dilemma involved with meeting payroll. It is factoring.
How Can Factoring Help?
Factoring involves turning over your open invoices to a third-party. In exchange, that third-party, known as a factor, gives you up to 90 percent of the value of those invoices. When your clients pay their invoices, the factor will send you the remainder of the invoices' value, minus a fee for their services. So you get up to 90 percent of the cash tied up in those invoices weeks before the client actually pays them. Then, you get the remainder once they pay.
What could you do with that cash?
- Meet payroll without sweating. You don't have to stay up every night trying to find the funds to cover your next payroll. This alleviate stress and makes the business fun again.
- Makes it possible to weather the ups and down of your industry. There are times when clients need more and more staff. There are times when they are ramping down. Freer cash flows make it possible for the agency to handle these kinds of fluctuations.
- Gives you happy employees and happy clients. Employees like to be paid on time. Clients don't like pressure to pay their invoices early. With the cash you get with factoring, both can be happy.
The Pros (and Cons) of Factoring
If factoring sounds like a good fit for your cash flow needs, you need to understand more about the pros and cons of this kind of financing.
Some of the pros include:
- More flexibility and agility in business. Freer cash flows allow you to navigate supply and demand in the industry.
- Less out of pocket needs. When cash flows get tight, you may be dipping into your own funds to cover everything. With factoring, you will be less likely to need to do that in the future.
- More financial security, less worry. This one bears repeating.
- Ability to grow. With cash flowing more freely, you will feel more comfortable taking on new clients in the future.
Some of the cons:
- Less control over your accounts receivable. The factor will handle payment processing and collections.
- Costs of factoring. There are costs involved with using a factor's services. This can add up to somewhere between 3 and 8 percent of the value of the invoices you factor. It is more expensive than traditional bank financing, but cheaper than many other forms of financing.
Is Factoring a Viable Alternative for Your Staffing Agency?
Factoring is a good financing option for many staffing agencies. It fits well with the business model of the industry. But factoring is not a good option for all staffing agencies.
- It requires creditworthy customers. the factor needs to know that the invoices will get paid by your client backspace.
- You cannot have any liens against your invoices. If you have a bank loan that uses your invoices as collateral , factoring is not an option. That is also true if you have a tax lien on your business assets.
- You need to have a sufficient volume of open invoices. Most factoring companies require a minimum value to the invoices factory each month.
If factoring sounds like a good fit for your staffing agency, the first step you should take is to talk with a factoring agency about your company and your cash flow needs.