Factoring has been around literally for thousands of years. In recent years, it has regained its former place as a reliable source of funding for businesses of all sorts, including staffing agencies. Like most funding options, factoring has its advantages and its disadvantages. It is important to understand both sides before deciding if you should factor your agency's invoices.
There are many reasons why factoring has been around for as long as it has been. Here are just a few that are pertinent to the staffing industry.
- Freeing up working capital. Staffing agencies act as a middle man between clients and employees. That role is difficult, especially with the gap between when the employee completes the work and the time the client pays for that work. The agency has to pay the employee long before the client pays the invoice for that work. With factoring, the cash that is trapped in those unpaid invoices is freed up. This gives the agency working capital that it can use to meet payroll and other business expenses.
- Security in vulnerable times. The past decade has definitely been a roller coaster ride as far as the economy. Many smaller staffing agencies went under because their clients were taking longer and longer to pay invoices, which caused a critical cash flow crunch. Factoring offers a secure line of funding which will be there in good economic times as well as bad ones.
- Flexibility. The lag between employee work and client payments can restrict any flexibility a staffing agency has. When a client asks for a major influx of help, the agency needs the ability to ramp up available employees and meet the increased payroll. Factoring offers the agency a way to get needed funding to manage the ramp up time.
- Saves the agency time. How much time do you or your employees have to make collection phone calls to your clients? Unless you are a large agency, with a dedicated collection department, you likely have little time to spend on chasing overdue invoices. By outsourcing most of your accounts receivable to a factor, you can free up your time and your employees' time to focus on what you do best.
- No collateral required. Most traditional lending sources require some sort of collateral before they will extend a loan. Small agencies likely have few resources that could stand as collateral. That means the owner may have to put up personal property instead. With factoring, this is no longer an issue. The factor does not require personal collateral, just invoices from creditworthy clients.
Now, of course, factoring is not perfect for every business or every situation. There are certain cons that you need to be aware of.
- Stigma of factoring. For some reason, factoring has gained a reputation in some circles as a funding source of last resort. This stigma can create concern that a business that is using factoring as a funding source is actually in deep financial trouble. The reality is different however. Factoring has been around for a long time, and is perfectly legal. Businesses of all sorts use it in their day-to-day operations.
- Giving up control. When you use a factor, you are going to give up a portion of the control you have over your agency. The factor will be the one receiving payments from your clients, not you. They will post those payments in your stead and you can only see the results. A factoring agency may also refuse to factor certain invoices from customer that have poor credit. This may prevent you from doing business with those businesses, or force you to manage their A/R needs in house.
- Cost. Factoring is more expensive than a traditional bank loan at a reasonable rate. The factor can take 1% to 8% of the value of the invoice as the fee, depending on the size of the invoice, the volume of invoices factored, and the terms of the contract. The factor may also charge interest on the money advanced against unpaid invoices. This can add up over time. While factoring does have costs associated with it, it does offer a source of funding when other sources are not available.
- The length of the contract. To get the best rates from the factoring agency, you will need to sign a longer contract, usually one to three years. If you are looking for a short-term infusion of cash, you may want to go with a shorter contract, but the fees will be higher.
If you want to see your staffing agency grow in new ways, you will need to free up the cash you have trapped in your unpaid invoices. That is where factoring can be helpful.