Staffing factoring is a subset of invoice factoring, a type of business financing commonly used by several industries to maximize cash flow and more effectively fund day-to-day operations by allowing businesses access to expedited cash without taking on debt. A company performing invoice factoring services – commonly known as a factor – purchases invoices at a discount from business-to-business (B2B) and business-to-government (B2G) companies. The factor pays out a portion of the receivable upfront. This means that the capital from an invoice that would usually payout in 30, 60 or 90 days is immediately usable. Factors will take anywhere from 1% to 3% of an invoice as a fee and pay out the remaining amount of the invoice to the company when the invoice is actually paid. Staffing factoring, which is also sometimes referred to as payroll factoring, specifically applies to staffing companies which organize and assign temporary employees. Staffing agencies regularly partner with factors because invoices from temporary workers traditionally take several weeks to pay out.
How Staffing Factoring Works
Similar to traditional invoice factoring, staffing factoring offers cash for unpaid invoices. Because the factor is purchasing your invoices, you won’t be making monthly payments like in the case of a business loan. Instead, the factor pays you a percentage of the invoice upfront, then once the invoice has been paid by your client, the factor will pay you the rest of the invoice amount minus fees.
Because invoice factoring involves three parties – a staffing agency, a staffing agency’s customer, and a factor company – there are more steps to the process than you would find with more traditional forms of financing. Here’s how staffing factoring works, step by step:
- You invoice your customer.
- You sell the invoice to the factor.
- The factor pays you an advance on the invoice
- Your customer makes payment on the invoice to the factor
- The factor forwards you the remaining amount, minus any fees
Recourse or Non-Recourse?
Companies may have to decide whether to use non-recourse or recourse factoring when partnering with a factor. Recourse factoring means that in the unlikely event an invoice is not paid, you – the staffing agency – are essentially responsible. Non-recourse factoring, however, means that the factor will take the bulk of the risk in the event of an unpaid invoice. Many factors offer non-recourse agreements that apply only when an invoice is unpaid because an agency’s customer company is declaring bankruptcy.
Depending on a staffing agency’s size and cash flow, either recourse or non-recourse factoring may be a viable choice. A factoring company may offer better terms to a staffing company if they allow for recourse factoring. If a staffing agency and their customers have exceedingly good credit, a factoring company may pursue non-recourse. Every agency’s situation is unique, so consult relevant parties before deciding whether to pursue recourse or non-recourse factoring.
Is Staffing Factoring Right for Your Business
Staffing agencies frequently turn to invoice factoring to improve cash flow. Staffing companies are especially vulnerable to gaps in capital since agencies are typically paid anywhere from two weeks to up to three months after staff are assigned in either permanent or temporary staffing roles. Staffing factoring most directly benefits companies that have a consistent flow of invoices or a large staff of temporary employees. Staffing agencies looking to increase their number of temporary employees, then, could greatly benefit from working together with a factor. Instead of paying temporary employees with the previous week’s paid-out invoices, a staffing factoring company allows an agency to pay their temporary employees more directly and efficiently.
Qualifying for Staffing Factoring
While staffing factoring is not a loan, agencies may need to consider certain qualifications to partner with a staffing factoring or payroll funding company. Like any other financing company, staffing factoring companies may want to see that an agency’s invoices are consistent and meet the minimum threshold for invoice factoring. When seeking staffing factoring, an agency’s own credit is considerably less important than the credit of the agency’s customers. Staffing agencies with less than perfect credit are still very likely able to qualify for invoice factoring if the credit of their invoiced customer is strong. Factoring companies may also prefer agencies that have been in business for more than two years. Staffing agency invoices from temporary employees are especially attractive to factoring companies because the outstanding invoices will almost certainly be paid since the temporary employee already completed their hours. Staffing invoices are traditionally submitted with timecards as well which act as a secondary guarantee that services were rendered.
Benefits of Staffing Factoring
Cash flow: The most direct benefit to staffing factoring is a quick increase in cash flow. This quick increase in on-hand capital can alleviate cash gaps that could impact day-to-day operations.
No Associated Debt: Rather than taking out a loan, staffing factoring lets a staffing agency hold more capital without the traditional expectation of repayment. Once a factor purchases a staffing agency’s invoices, the factor will take on the collection of the invoice. Both loans and factoring are strategies to expand an agency’s amount of liquid capital. While a loan offers capital in exchange for the guarantee it will be repaid, factoring simply expedites money already guaranteed to an agency from their own invoices.
Better Customer & Employee Experiences: Companies offering invoice factoring services are not borrowers. Working with a factor is a partnership. Factors are financial companies and will often be more than happy to meet and consult with an agency to determine the best financial moves for their unique business. Factors may also be able to help agencies make better informed choices about which customer companies to partner with in the future.
Cons and Potential Problems with Staffing Factoring
Staffing factoring has one key downside that may turn away staffing agencies. Transactions with staffing factoring companies typically charge a 1% to 4% fee. Depending on the cash value of an invoice, agencies may decide that the fee paid to the invoice factoring company may not be worth the cost. Larger staffing agencies may then forgo staffing factoring in exchange for other kinds of capital guarantees.
Recourse factoring may also push some businesses away from staffing factoring. In the case of a recourse factoring agreement, if a customer merchant cannot pay an invoice, the staffing agency is fully responsible for the amount drawn. An agency, then, may consider the factoring agreement superfluous since they are still accountable for the bad invoice. When partnering with a staffing factoring company, agencies should weigh whether to pursue non-recourse or recourse factoring based on the credit and trustworthiness of their own customers.
Bottomline on Staffing Factoring
Cash flow is king in the staffing industry. If an agency has more capital on hand it can maintain higher liquidity after payroll, and widen its prospects. Depending on the size of a staffing agency, invoice factoring can expedite growth as efficiently as a loan, but without the worry of taking on debt.
Invoice factoring agencies are an invaluable partner to staffing agencies. Working together with a factor allows an agency to take better-calculated risks when partnering with new clients and can benefit an agency’s credit. As an agency expands and builds a relationship with its factor, an invoice factoring company can quickly become a resource for making more informed business decisions.
When deciding to partner with a factor, staffing agencies must consider how valuable on-hand capital is at their current capacity. For example: if an agency can use expedited capital to keep its business sustainable, staffing factoring can be a great resource. If a company has a density of unpaid invoices that leaves most of their capital on a weeks-long countdown, staffing factoring can speed up opportunities for growth that would regularly take much longer.
Invoice factoring offers agencies the financial flexibility to potentially take on larger accounts and expedite their own growth. Especially in the staffing industry, having more on-hand capital makes your agency more competitive, well-positioned and poised to grow.
If your agency is interested in learning more about invoice factoring and staffing factoring, get in touch with a Kapitus financing specialist who can walk you through the options available to you based on your unique situation.