Making payroll is the most important task for any growing staffing agency. You can retain high quality talent only if you offer good salaries and pay on time. Obviously, missing payroll would put your business in jeopardy. Therefore, it should never be an option.
But payroll can be a weekly challenge
But making payroll remains a serious problem for staffing agencies. In most cases, payroll problems stem from two issues. The first issue is that most clients pay their invoices in 30 to 60 days. However, you have to pay employees every week or two. The second problem is that most companies have low cash reserves. This leaves them unprepared to handle payroll while waiting for a client to pay.
You can accelerate some of your client’s payment by offering early payment discounts, but that solution has limitations. And building a cash reserve can be difficult if your company is a startup agency or if it’s growing quickly.
Problems get worse as you grow
Actually, these problems often get worse as your agency grows – especially if it grows quickly. Your staffing agency may show great profits on paper, but it will be cash flow poor. Most of its cash will be tied to slow-paying invoices. It’s a viscous cycle that never ends well.
If you catch the problem in time, you can solve it by scaling back growth. But scaling back growth is not an option that business owners like.
A better alternative is to build a cash reserve, while using external financing to help pay for operating costs. Although there are a number of options that can be used for payroll financing, the best one is invoice factoring.
Finance payroll with invoice factoring
The biggest reason why staffing agencies cannot meet payroll is that their funds are tied to slow paying invoices. Invoice factoring solves this problem and allows you to finance slow-paying invoices. It provides you with immediate funds to cover payroll, pay for business expenses, and grow.
Transactions are fairly simple. Once you have a financing account with the payroll funding company, you submit an invoice along with a copy of the time cards (or similar). Once they have your invoices, the payroll finance company advances 90% – 93% of the invoices and deposits the funds in your bank account. You now have the money to cover payroll.
Once your client pays in full, the funding company settles the transaction by depositing the remaining 7% – 10% of the invoice, less a fee, in your bank account.
The cost of factoring varies, but it can be between 1.15% – 3.5% per month based on your sales volume and the credit quality of your invoices. For detailed information, please read our comprehensive guide ‘What is factoring?‘
Setting up an account is relatively simple and takes one to two weeks. In some cases, it can be done even faster. Most companies factor their invoices regularly to improve their cash flow.
Using payroll financing effectively
There are several ways your agency can use payroll funding effectively. Consider discussing this with your financial team or CPA.
One strategy is to build a cash reserve while using payroll financing to cover business expenses. This cash reserve will be useful later on if problems arise. The drawback of this strategy is that the cost of financing lowers your profit margins. You will need to balance this and get the best use of your funds.
Advantages of invoice factoring
Using a factoring solution to finance payroll has a number of advantages over other solutions. These advantages include:
- Improves cash flow issues due to slow paying receivables
- The line increases as your business grows
- Provides quick access to funds
- Easy to qualify for it
Is factoring right for your staffing agency?
Payroll funding can help your agency make payroll and improve its cash flow if your biggest problem is that commercial clients are paying your invoices in 30 – 60 days. It can be the right solution because factoring was designed to fix this specific problem.
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.