Many ambitious entrepreneurs who once worked for staffing agencies have taken the bold step to launch their own businesses. Today, numerous thriving startup staffing firms efficiently manage more than three hundred temporary workers. While the path to running a successful staffing agency is not without its obstacles and daily challenges, one thing is certain: financing for payroll is not the stumbling block it may seem. By harnessing the potential of your unpaid invoices as collateral, your staffing agency can experience limitless growth.
A common observation is that the primary deterrent for aspiring staffing entrepreneurs is a limited understanding of payroll financing. The apprehension of managing numerous temporary orders and extending credit terms, such as Net 30 or Net 45 days, can create a daunting cash flow challenge, especially when it comes to meeting payroll demands.
Conventional banks often present startup staffing agencies with significant difficulties when attempting to secure funding for payroll. The absence of an established track record, historical deposits, sales, employees, or contracts can render a visit to the bank for a payroll loan a pointless effort. Instead, many forward-thinking agencies opt for alternative solutions like invoice factoring, where they can leverage their unpaid invoices to obtain immediate capital, ensuring smooth operations and facilitating growth.
While there may be some variability in the underwriting parameters of different factoring companies, the following tips can significantly enhance your chances of getting approved for an accounts receivable-based factoring arrangement:
Choose a Distinctive Business Name: Begin by searching for a short, memorable business name that uniquely represents your new venture. Ensure that the name is not already in use, avoiding similarities to competitors. Additionally, secure an associated domain name. A concise and distinctive business name will prove invaluable for marketing your agency in the future.
Professional Email Setup: In the early stages of your startup, perception is everything. Establish a professional email address using your company name rather than relying on generic services like Gmail or Yahoo. This simple step instills confidence in potential clients and partners, signaling that your business is well-established. Make sure to have this established prior to registering your business name with the secretary of state.
Opt for the Right Business Structure and Address: Lay a strong foundation by structuring your business as a corporation from the outset. Avoid the sole proprietorship business formation, as it may deter potential financing companies. For home-based businesses, invest in a virtual mail office with a professional business address, steering clear of using your home address. This professional image enhances your credibility and prevents your home address showing up in the business profile or public records.
Secure Necessary Insurance and Software: Acquire essential insurance coverage and opt for software subscriptions that cater specifically to staffing agencies and meet the requirements of factoring companies. Some factoring companies offer their clients specialized software designed to streamline operations. When selecting an invoicing software, ensure that it can automatically generate new invoice numbers, manage terms, track invoice dates, calculate due dates, references work week, convert time to decimals, incorporate markup, manage reference numbers, and input purchase order numbers and special instructions for specific clients, such as "Remittance Instructions." These features are crucial when presenting invoices for funding.
Prioritize Creditworthy Clients: The success of accounts receivable financing hinges on the financial strength of your clients. Focus your efforts on servicing creditworthy customers, even if it means turning away non-performing or unqualified clients. While declining business may seem counterintuitive, providing services to creditworthy clients is a strategic stance. Any losses incurred due to non-payment by a single client can have far-reaching consequences for your entire operation. A factoring company is equipped with credit reporting databases that can guide you in selecting creditworthy clients.
Invoice factoring is not a loan, and the cost is not calculated with an interest rate. A factoring agreement is a simple seller (The staffing agency) and a buyer (The factoring company) relationship. As the staffing company generates weekly invoices for services rendered from the previous week, the factor purchases the invoices at a discount rate (Not interest) averaging anywhere from 2% to 4% of the invoice’s face value depending on how long the invoices remain outstanding. A factor is basically converting the receivable assets to a cash asset for a discount fee. This method of financing is used by many staffing agencies of all sizes and has worked very well in the industry.
In conclusion, if you're looking to launch your own staffing agency and overcome the financing challenges that often plague startups, invoice factoring is a powerful tool at your disposal. By following these tips and leveraging the potential of invoice factoring, you can ensure a smoother journey toward establishing and expanding your staffing agency. Ultimately, this approach can turn your entrepreneurial vision into a thriving reality, unlocking the limitless growth potential that awaits your agency in the staffing industry.
Article written by Raul Esqueda, President of 1st Commercial Credit, LLC