Payroll Financing for Staffing Companies

Making payroll is the most critical task for any growing staffing agency. You can retain high-quality talent only if you offer good salaries, good jobs, and you pay on time. However, cash flow problems jeopardize your ability to pay employees on time and prevent your company from reaching its true potential. In this article, we cover:

  1. What is the source of the problem?
  2. Why growth makes the problem worse
  3. Using early payment discounts
  4. What is payroll financing?
  5. Advantages and disadvantages
  6. How much does it cost?
  7. Is payroll financing right for your staffing agency?
  8. How to use it effectively

1. The problem: why payroll is a challenge

Most staffing agencies encounter financial problems at one time or another. These problems commonly affect companies that are just starting. However, they also affect companies that are adding new clients and growing quickly. This scenario can be insidious, as the company runs into financial problems just as things apparently improve.

Cash flow problems often occur because revenues are delayed. Most agencies have to offer net-30- to net-60-day payment terms to their clients. Large clients often demand terms as a condition of awarding a contract. Payment terms can give your clients up to two months to pay you.

However, your employees and suppliers must be paid regularly. Most employees need to be paid bi-weekly, and suppliers expect to be paid immediately. Consequently, you have to pay these expenses out of your emergency cash reserve and wait for clients to pay on their usual 30- to 60-day terms.

Unfortunately, there is another problem. Most staffing agencies don’t have an adequate cash reserve nor do they get many opportunities to build one. Consequently, they can easily overextend themselves and experience financial problems.

2. Growth can backfire

Most agency owners believe that they will be able to grow out of their financial problems. After all, sales should bring in revenues. This isn’t always the case as sales growth doesn’t always work as you’d expect. Growth comes in spurts and is seldom smooth and predictable. Furthermore, your new customers still take 30 to 60 days to pay. This delay has the unfortunate effect of increasing the demands on your cash reserve.

Ultimately, the gap between your cash on hand and your expenses grows. This gap can lead to missed payroll or missed payroll tax payments. In general, once this happens, the business spirals out of control unless the problem is addressed quickly.

3. Early payment discounts improve cash flow

If your staffing agency’s slow-paying clients create cash flow problems, consider offering early payment discounts. They are a practical solution that can improve your cash flow quickly and increase client satisfaction.

As their name implies, early payment discounts work by providing your client with a discount in exchange for a quick payment. The most common option is to offer a 2% discount if the client pays in 10 days. Otherwise, they must pay the invoice in full.

Discounts are negotiable, so it is to your advantage to negotiate the lowest possible discount for the fastest payment. Common options include:

  • 1%/10 – net 30
  • 1%/10 – net 60
  • 2%/10 – net 60

a) They are optional

While we advocate offering discounts for early payments, they have a limitation. These payments are optional. Consequently, your clients choose if and when to pay quickly. It’s common for clients to stop taking the discount and revert to paying slowly when the economy takes a turn. Coincidentally, that is when you need quick payments the most.

b) Offer discounts carefully

Offer early payment discounts only to your best clients. It is tempting to offer them to your worst-paying clients, but that strategy can backfire. A financially troubled client that is also unscrupulous could opt to take the discount and pay slowly anyways. This customer behavior happens often enough to warrant concern.

4. What is payroll financing?

Payroll funding allows staffing agencies to finance their slow-paying invoices from creditworthy clients. This tool solves the cash flow problems created by slow-paying invoices. Payroll financing provides the agency with the funds it needs to meet payroll and supplier expenses.

Most small and growing staffing agencies use invoice factoring as their payroll financing solution. However, larger staffing agencies can use sales ledger financing or a receivables-based, asset-based loan.

Factoring, sales ledger financing, and asset-based lending are offered by factoring companies and work in similar ways. In most cases, the factoring company finances your invoices in two installments.

The first installment is referred to as the advance and covers 90% to 95% of the invoice. It is deposited in your bank account as soon as the invoice is financed. The remaining 5% to 10%, less a finance fee, is deposited to your bank account once the invoice is paid in full. This second installment settles the transaction.

5. Advantages of using payroll financing

Using a factoring solution to finance payroll has several advantages over other solutions. Note that sales ledger financing and asset-based loans have similar benefits. These benefits include:

  1. Improves cash flow issues due to slow-paying receivables
  2. The line increases as your business grows
  3. Provides quick access to funds
  4. Easy to qualify for it

6. How much does payroll financing cost?

The rates for payroll financing depend on which solution you get, the size of your line, the quality of your clients, and how long they take to pay.

Most new and growing agencies use factoring, at least initially. The cost of factoring varies between 1.15% and 3.5%. Sales ledger lines of credit and asset-based lines based on receivables have lower costs but have more qualification requirements. Ledgered lines and asset-based loans also tend to have more covenants than factoring. However, all three solutions are easier to obtain than conventional financing.

Setting up these lines is relatively simple. Companies can set up a factoring line in a few days. Asset-based lines and ledgered lines can take a little longer since they have more stringent due diligence.

7. Using payroll financing effectively

There are several ways your agency can use payroll funding effectively. Consider discussing this with your financial team or CPA. A common strategy is to initially rely on payroll financing while the staffing agency builds a cash reserve. As the reserve grows, you can rely less on financing, which increases your margins. It’s often a good idea to keep a financing line as a backup reserve or to handle rapid growth.

8. Is factoring right for your staffing agency?

Payroll funding is designed to solve a specific problem. It can help your agency make payroll and improve its cash flow if your:

  1. Main problem is that commercial clients pay slowly
  2. Clients pay in 30 to 60 days – and –
  3. Clients have good commercial credit

Does your staffing agency need funding?

Does your staffing agency need funds to make payroll? We are a leading provider of factoring to staffing agencies. Get an instant online quote or speak to a specialist by calling (877) 300 3258.