Many entrepreneurs that work in the staffing industry like it because it is thought to be less capital intensive than other industries. The concept is that you only hire the employees you need them, when you need them and only to handle the contracts that you have. Although this sounds great – in theory – the industry seldom works like that in the real world.
In realty, the industry is capital intensive, though not in the traditional sense. You don’t need funds to buy capital equipment. But you need working capital to pay all your employees. More often than not, you will also need some type of business financing if you plan to grow the company. The reason for this is simple. While staffing agencies are very profitable, their income and expenses are mismatched. And handling this problem requires funds.
Income vs. Expenses – It’s all about timing
What do we mean when we say that staffing agency income and expenses are mismatched? Well, most staffing agency employees need to be paid every week (or every two weeks) through payroll. However, most agency customers pay their invoices on net-30 or net-60 day terms. Said simply, expenses are fairly immediate but your income is delayed by 30 to 60 days. This means that the company needs to cover payroll from its own capital reserves while waiting to be paid. And if you run out of reserves, your company will be in trouble – or at the least – it won’t be able to take on new clients.
Two approaches to solving this problem
There are two ways to approach this problem. One way is to ask customers to pay quickly. However, this is often difficult as large customers usually like to pay their invoices on net 30 terms because it’s good for their cash flow. Another approach is to accelerate your customer payments using a factoring program for staffing agencies. This program uses a financial intermediary that advances you funds based on your open invoices to credit worthy customers. You get paid by the factoring company immediately – who then holds your invoices until they get paid by your end customer.
There are a number of advantages to this type of business financing. One advantage is that it works for companies that don’t have assets in the traditional sense of the word. Also, it ‘s easier to obtain than other forms of conventional business financing. The most important requirement to qualify is that your customers have good commercial credit. This is important because factoring companies consider your invoices to be your most important asset. Aside from this, your company needs to be free of legal and tax problems.
Working with a factoring companies can be an ideal solution for a small or medium sized staffing agency. It works very well in environments where the staffing company has important opportunities that can’t be realized because of slow paying clients.