Making payroll is the most important responsibility for a staffing agency owner. It’s also the largest recurring expense and most challenging responsibility for company owners. Unfortunately, staffing companies can experience cash flow shortfalls because they are growing quickly or lack a cash reserve.
This article discusses how payroll financing can help staffing companies that need funds to handle operations. The article covers the following:
- Why is payroll a problem?
- Growth vs. payroll
- Early payment discounts
- What is payroll financing?
- Advantages of payroll financing
- Does your staffing company qualify?
1. Why is payroll a problem?
Staffing agencies have demanding cash flows, especially if they are growing quickly. Their biggest expense is employee salaries, which must be paid regularly on specific dates. However, staffing companies often work with clients who ask for net-30 day terms. These terms allow the client up to 30 days (or longer) to pay an invoice after the work is completed.
Offering payment terms is typical in commercial transactions, especially with larger clients. These terms are often non-negotiable. Your company must provide terms if they want to work with the client. However, offering terms affects your staffing agency’s cash flow. You need to have sufficient cash reserves to cover expenses. Otherwise, your company could run out of funds.
Let’s look at a simplified example to understand a staffing company’s cash position better. The company has a staffing roster of 10 employees. Total payroll is $100,000 per month at $10,000 per employee. The agency has a 20% markup and invoices $120,000 to clients on net-30-day terms. Assume funds are received and paid at the end of every month.
As the table shows, it takes six months for the company to have a positive cash position. The company would have needed a sizable cash reserve to handle the initial months of operation. Otherwise, the company would have been in trouble.
2. Growth and payroll
Growing a staffing company places additional demands on your cash flow. The company must hire staff and cover payroll until it gets paid by the end customer. The funds for these expenses must come out of their cash reserves.
Let’s examine a modified version of the previous example to see how growth affects cash flow. Assume the company adds a new employee every month, starting in February. The payroll costs for each employee remain at $10,000, as does the 20% markup.
As you can see, the company has to wait until August to show a positive cash flow. Faster growth, or clients deciding to pay in 45 days instead of 30 days, would worsen the situation. It’s easy to see why staffing companies can get into cash flow problems, especially if they are growing quickly.
3. Early payment discounts
One way to improve cash flow is to offer an early payment discount to your clients. Basically, clients get a 2% discount if they pay within ten days or less. Otherwise, they pay the total amount on their usual terms.
Early payment discounts can work well if the company’s cash flow problems are minor. This incentive is voluntary, and your client is not required to pay early. Consequently, you always have some uncertainty regarding the payment.
4. What is payroll financing?
Payroll financing is the industry name for a specialized type of factoring designed to help staffing agencies with their payroll. It allows staffing agencies to finance invoices from slow-paying clients. The funds from the factoring company improve the staffing agency’s cash flow, enabling the agency to cover payroll and take on new clients while minimizing cash flow concerns.
Most factoring transactions are structured using two instalments. The first instalment is called the advance. It covers 90% to 95% of the invoice and is deposited into your bank shortly after you submit the invoice to the factor. The remaining 5% to 10%, less the factoring fee, is deposited into your account as a second instalment once your end customer pays the invoice on their usual terms. To learn more, read “What is Factoring?” and “How Does Invoice Factoring Work?”
5. Advantages of payroll financing
Payroll financing has several benefits over other financing solutions. Here are four reasons main why staffing agencies use factoring to finance their payroll:
a) Allows you to offer terms
The most important advantage of payroll financing is that it allows you to offer payment terms to clients while limiting potential cash flow issues. It helps ensure that your company has the liquidity to meet its payroll obligations on time.
b) Adapts to your growth
Payroll financing lines adapt to your invoicing levels. The line can grow as your staffing agency secures new clients and grows its revenues.
c) Available to new/small staffing agencies
Most lines are available to small and new companies. It can be used as a stepping stone to bank financing solutions.
d) Simple qualification requirements
Lines are designed to have simple qualification requirements. Additionally, they don’t have complex covenants like many bank options.
6. Does your staffing company qualify?
Qualifying for payroll financing using factoring is simple. The most important requirements include having the following:
- Organized business (provincial or federal)
- Creditworthy clients
- Accounts receivable free of liens (PPSA or hypothèques)
- Up-to-date taxes
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