Making payroll is one of the most important responsibilities for a staffing agency owner. Your employees are truly your most important asset and making sure they are paid on time is critical to keeping them productive when working at client sites.
One of the biggest problems for staffing company owners is that many commercial clients demand payment terms as a condition of working with you. This means that they will pay your invoice in 30 to 60 days. However, you still need to pay you staff every week or two weeks.
If you company has some money set aside as a reserve, waiting for payment should not be a problem. You can pay employees out of your reserves and settle when your clients pay you. But if you don’t have reserves, because your company is new or growing quickly, you could run into financial problems.
Do quick payment discounts work?
Many staffing agencies try to fix this cash flow problem by asking clients for a quick payment, often in exchange for a discount. It’s common to offer a 2% invoice reduction if the client pays in 10 days.
This strategy has two problems. Some of your clients may start question the financial viability of your company. And while this approach will improve your working capital, it will not provide reliable cash flow since your clients are always free to start paying slowly.
Factoring your invoices
A better solution is to finance your invoices with a factoring financing plan. The solution provides an advance for your slow paying invoices from creditworthy commercial clients. Instead of waiting up to 60 days to get paid, a factor provides an immediate payment. You can use these funds to cover payroll expenses and other important operating costs. The transaction settles once your customer pays on their usual terms.
With an invoice financing solution in place, you will be able to offer payment terms to your clients and get your funds shortly after invoicing. This enables you to take on new staffing clients without worrying about slow payments.
To learn more, please read “What is factoring financing?”
Transactions are often funded in two installments and follow this model:
- You submit the invoice and time cards to your client
- You submit a copy of the invoices/cards to the factoring company
- The factor advances up to 90% of your invoices
- After 60 days, your clients pays
- The factor rebates the remaining 10%, less the fee
You can use receivables financing on an ongoing basis to ensure that you always have funds to meet your operating expenses.
Factors will often verify invoices prior to funding. This process can be expedited if your employees use time cards that are signed by the client.
Do you qualify?
If you plan to use factoring, your invoices should be of high quality. This means that your clients should have good credit and your billing processes should be effective. These two points are the most important for the success of a transaction. Additionally, your company should not have serious legal/tax problems and your receivables should be free of liens.
The due diligence process is often done quickly and can be completed in a day or two. This means that the initial funding of an account can be done in 5 to 10 days after the application is received. Once the account is set up, subsequent fundings can be done in a day or two.
This finance program has a number of competitive advantages over other solutions. The most important one is that it will stabilize your cash flow, enabling you to operate your agency more effectively. This will be particularly helpful if you have trouble offering credit to your clients.
More importantly, the solution is designed to support your growth. The line can grow alongside your staffing revenues, as long as your clients and invoices meet the funding criteria. This makes accounts receivable financing a great alternative for staffing agencies that have working capital problems due to slow paying clients.