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Is Your Staffing Company Out Of Payroll Money?

How Are Staffing Companies Able to Sustain Payroll During Growth

Published 10/1/2012

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Staffing companies face unique challenges in terms of financing their businesses. For example, sustaining payroll during growth modes may require unique and flexible financing options. Traditional bank loans are often not feasible or even available for staffing companies. Staffing companies face challenges to meet payroll often because staffing companies must pay temporary and/or contract employees on a weekly or bi-weekly basis. However, staffing companies contract with client companies which require the temporary or contract staff. The contract may stipulation a Net 15, net 30 or even net 60 payment terms. This means that the staffing company submits an invoice to the contracted company. The company then has 15, 30 or even 60 days to pay the invoice. More on Factoring Companies that Finance Staffing Companies

Most staffing companies bill client companies once per month or even once per quarter. Because of the delay between the payment is paid by way of wages to the staffer or temporary employee and the client company's invoice payment, staffing companies generally will seek out ways to obtain the necessary operating capital for the business.

Staffing Companies Serving State and Federal Contracts

Staffing companies serve a variety of industries. One of the most common types of staffing company is a company that provides contracted resources to work on government-funded projects. For example, when Lockheed Martin wins a new federal contract, much of the labor that they utilize on the project is contracted labor. Though many of the positions require highly skilled, highly educated workers, such as engineers and certified project managers, the workers are contracted for a specific amount of time. IT professionals are often contracted through staffing companies to work on such projects. Contractors are generally hired to work for the duration of the project, and then they move on to another contract. Some contract workers solely work on federally funded and state funded projects.

The benefit for workers to accept contracts is that the wage is generally higher than they would receive working a full time job performing similar job duties. Staffing companies will often provide these highly skilled workers with benefits that are comparable to those that would be available through full time employment.

Occasionally, contract workers will be offered employment with the company for which they are contracted. In this case, the staffing company receives a commission for the hire.

Temporary Labor Staffing companies

Another type of staffing company specializes in managing temporary resources for call centers and other clients who have the need for seasonal or temporary employees. These staffing companies will staff companies that have requirements for a certain number of semi-skilled workers for a specific amount of time. Some workers may also be hired to full-time positions. If an employee is hired, the client company pays a commission to the staffing company.

Traditional Bank Financing

Traditional bank financing would require that the staffing company take out a loan to cover the operational costs to pay staffers and temporary workers. The cost of the loan, with interest, may be substantial. No matter the rate of interest, the cost of the interest directly cuts into the staffing company's profits.

Additionally, staffing companies may not have the option to obtain traditional bank loans. Banks tend to base approvals of loans on tangible hard assets. The assets of staffing companies are their staffers and temporary employees. A bank will not consider the temporary employment of an individual as an asset as they would consider a piece of heavy equipment used by a construction company. Staffing companies likely will not have hard assets to be used for collateral for bank financing. The staffing company may own the real estate where the offices are located. A bank may consider a loan based on this type of stationary tangible asset. However, many staffing companies do not own property and operate basically on a shoestring budget. In these cases, the company would not qualify for traditional bank financing.

Inventory is also considered as a tangible hard asset that a bank may consider for use as collateral for a loan. Again, staffing companies do not carry any type of conventional inventory. Therefore, staffing companies generally do not have any type of collateral that would be acceptable to a bank for consideration for a loan.

Receivable Based Asset Lending for Temp Staffing Companies

Asset based lending is a viable alternative to traditional loans for staffing companies. Staffing companies are generally undercapitalized, but many have performing receivables. In order for staffing companies to grow faster than their ability to take in cash, asset based lending may provide an answer to the cash flow problem. Note that asset based lenders generally require that the staffing company take in a certain amount in sales each month.

Asset based financing provides cash to staffing companies based on the value of the company's receivables. The staffing company pledges a certain amount of the incoming funds to the asset based lender. A loan is made by the asset based lender to the staffing company based on the value of the receivables. The staffing company pays off the loan when the receivables are paid and the cash is received. If the staffing company defaults on the loan, the asset based lender will seize the pledged funds.

Asset based financing may be an option for staffing companies with less-than-ideal credit ratings. Asset based lenders for Staffing Agencies may charge a higher interest rate than traditional banks. However, in recent years asset based loans have become very competitive and interest rates have fallen.

When staffing companies obtain an asset based loan, the company can generally expect to receive about 75 percent of the value of the receivable for newer invoices. The ratio of loan-to-value decreases for older invoices. Asset based lending is an alternative to the traditional bank loan. However, the staffing company pays a considerable cost to borrow the operational funds, once again cutting into the company's profits.

Factoring Staffing Agencies

For staffing companies moving through a fast growth phase, particularly if the company has less-than-ideal credit, another option for operational financing is factoring. Factoring can get the staffing company the cash the company needs quickly with a minimal amount of processing.

Factoring is a financing option where the staffing company sells a portion of their receivables to a factoring company for cash. Factoring is not considered a loan because the factoring company actually purchases the receivables from the staffing company at a discounted price. Generally, the staffing company receives about 90 percent of the value of the invoices with a factoring arrangement. The factoring company assumes the responsibility of collecting on the invoices. In turn, the factoring company assesses a fee, along with their commission of approximately 0.59% to 4% depending on the volume and industry.

The three financing options of traditional loans, asset based financing and factoring enable staffing companies to finance payroll for their contracted employees during the interim time between payment to employees and when client companies pay the invoice. Though staffing companies will pay a portion of profits for any of the three methods of financing, each method provides an avenue for the company to continue to grow while the staffing company pays employees to work on current contracts. Though asset based financing and factoring may cost the staffing company more in fees and/or interest rates than traditional financing, both asset based financing options and factoring are available to staffing companies with less than perfect credit.

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