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Lending and Financing Options for Temp Staffing Companies

Published 10/1/2012

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Temporary staffing agencies provide needed services for both employers and potential job applicants. Applicants looking for work experience or temporary incomes can benefit from the positions available through staffing agencies. Companies wanting to pre-screen potential full-time workers or fill temporary work assignments can also benefit.

And while temp agencies do fill a genuine need, the “middleman” position they fill can make it difficult to develop a strong financial base for future growth. Fortunately, specialty lenders can provide the type of financing needed to help temp agencies better manage their available assets and resources.

More Information at Lending Options for Staffing Companies

Types of Staffing Agencies

Temporary staffing agencies are set up to service a range of different industries. Some agencies specialize in one area, such as medical, accounting or sales while others may work within several different areas. The more specialized agencies typically have certain applicant requirements in terms of education and work experience. Agencies that work within different industries often have more entry-level positions, such as customer service, assembly-line work and administrative positions.

The open job positions found in staffing agencies are developed through contract agreements made with local and regional employers who have jobs to fill. In addition to finding people to fill these positions, staffing agencies also handle much of the administration and paperwork that's normally done by employers, such as payroll taxes and hirings and terminations.

As a contract-based business, temporary staffing agencies receive payments from employers for work completed by temp employees on a monthly or bimonthly basis, while employees are typically paid on a weekly or biweekly basis. As a result, the time lag between contract payments and payroll schedules can place a considerable strain on an agency's cash-flow needs.

Invoice Payments

Invoicing and payment schedules play pivotal roles in the financial workings of a temp staffing agency. Employer contracts are often set up on a 30 to 60 day payment schedule. And while an agency may have several employees working for a particular employer, the agency doesn't receive payment for their work until the 30 to 60 day period passes. This means agencies must cover employee paychecks out-of-pocket until employer invoices come due.

In the midst of a slow or failing economy, many employers hesitate to hire new permanent employees as business can slow down at any time. Under these conditions, companies often turn to staffing agencies to fill positions on a temporary basis. And while this is good news for staffing agencies, those wanting to take on more clients or employer contracts may be at a disadvantage cash-wise because of the inherent invoice-payment structure that makes their business model work. Likewise, agencies wanting to expand into new locations may also find it difficult to access needed monies. More on Lending Companies for Staffing

Lending Options

Just like any other type of business, temporary staffing agencies need working capital for start-up money or to begin new projects. Businesses may also require short-term financing to make it through periods where available assets are tied up in other areas. Depending on a business' credit-worthiness and industry experience, a bank loan can be the best option, though a temp agency's cash-flow schedules may not sit well with banking requirements, especially in tough economic environments.

Finance agencies that specialize in “factoring” provide another lending option for businesses with tenable cash-flow schedules, like those found in temporary staffing agencies. Factoring financing works very much like short-term lending that's based on a business' expected income earnings within specific time periods. So, an agency that's waiting to be paid on employer contracts can borrow the same owed amount from a factoring lender. Once the contract payments come due, the lender collects the payments. In effect, this arrangement allows temp staffing agencies to make use of needed revenue that would otherwise be unavailable.

Financing Qualifications

As financial needs can vary depending on the needs of a business, financing qualifications for a temp staffing agency can vary depending on its financial strength and projected future returns. The economic and employment markets may also have a bearing on how a lender views an agency's ability to pay back on a loan, especially in a slow economy. This means, lenders that shy away from the more risky business models are less likely to loan to a temp staffing agency.

Bank loans are often the most difficult to come by in terms of the bank's requirements to qualify. For a temp staffing agency, a bank may require the company to take out an insurance policy naming the bank as beneficiary. Doing so ensures the bank will recoup on any monies loaned should the agency go belly-up. Banks also favor companies that have considerable assets on hand over those with little or none. For many staffing businesses, this is an automatic disqualifier simply because of the way their cash-flow and balance sheets are set up.

Lenders that provide short-term loans may also view a temp agency's balance sheet flow as a high-risk factor. And while a short-term loan may be easier to get, these lenders protect themselves against risk by charging higher interest rates and fees.

Financing Needs

Unlike the more consistent business models found in retail and manufacturing companies, financing needs for temp staffing agencies often extend past any initial start-up costs. The ongoing lag in incoming revenue makes it difficult if not impossible for staffing agencies to generate the capital needed for expansion and growth. So when it comes to financing needs, factoring lenders provide the type of financing that allows for future growth and development.

Payroll expenses remain an ongoing financing need for temp staffing agencies. Factoring lenders for staffing companies are specifically set up to address the short-term imbalance between incoming revenues and outgoing expenses that make it difficult for temp agencies to get ahead. Once an agency issues a payment invoice to an employer, factoring lenders pay the invoice amount to the agency. So an agency with 20 outstanding invoices totaling $7,500 for 200 employees would have this cash on hand to work with instead of dipping into its cash reserves to meet payroll expenses.

Also at issue, are the different pay cycles each employer contract is on versus the payroll expenses for different employer groups. Since an agency may sign up a new employer-client at any time, this makes it difficult to coordinate ongoing revenues and expenses. The consistent financing provided by factoring lenders makes it possible to better allocate anticipated earnings, which makes future planning less unpredictable.

Compliance Issues

Different types of lenders must meet any existing compliance requirements within their particular sectors. In effect, compliance issues determine the types of loans a lender can grant. As banking institutions fall under federal jurisdiction, compliance requirements are much more stringent than for other lender types. This means a temporary staffing agency would have to provide information on its net worth, monthly financial statements and internal auditing reports. Compliance requirements also determine the type of criteria banks use to approve or deny a loan.

Market or industry sectors can also influence a lender's ability to service a particular industry. So a temp agency that specializes in placing medical professionals may fair better in the eyes of a lender than an agency that doesn't specialize. Strong market sectors, such as medical and technology can generate a more substantial revenue stream for temp agencies that customer service or sales sectors. Much like the criteria used to deny or approve a loan, risk factors affect the types of regulations a particular lender must follow.

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