How invoice factoring can help staffing agencies
Your staffing agency is taking off, it's exciting, but you realize there may be a major limitation to your growth; cash flow. This need not be a limitation at all, especially for a staffing agency who has a great contractor base, and some excellent companies with temporary positions to fill.
First, let's examine some scenarios that may have you worried about cash flow:
Your staffing agency is just starting up
You are established but experiencing a period of rapid growth
The gap between paying your staff and receiving payment is significant
You are ready and able to gain market share but do not have the funds to support your growth
The most important, but also the most challenging phase for your staffing agency is any period in which you are experiencing growth, and you need to capitalize on that upturn in business. A staffing agency that is still growing will most likely have limited cash reserves. For example, it may have an established a base of 100 temporary staff, and is billing thousands of dollars a week. For each contractor the company will most likely not receive payment for 30 days or more, but will need to start paying the temporary staff from week one. If there are limited funds available, the answer is likely going to mean finding positions for fewer people so the business can run successfully, but this means slower growth and possibly loss of market share as a result.
To qualify for traditional financing, you need to be established and have a solid track record. A start up staffing agency most likely has little or no tangible assets with which to secure a loan.
Your asset is your accounts receivables, which is not generally considered a concrete enough asset for a bank. Banks want to see real assets like machinery, a brick and mortar building or a history of success. They want to know they can recover any loans they issue with your collateral.
What is the answer? Factoring offers a simple solution, and periods of growth are perfect opportunities for a factor to help you. We mentioned your assets being your accounts receivables, and these are literally like gold for a factoring company. You will not have to jump through the same hoops as you do when applying for a traditional loan or line of credit. You are technically 'selling' your asset, which is your unpaid invoice, to a factor. Your customer does not have to pay the invoice early, but you have the benefit of using those funds to pay your contractors when they need to be paid. Your payment cycle gap has effectively been eliminated and you can continue to grow.
So let's revisit why, during start up and periods of growth, your company is not attractive to a traditional bank.
They are not looking at your potential for success
You are a risky prospect if you are not established and making money
Banks realize that small businesses often fail within the first year, as documented by
smallbistrends.com which is an indication as to why banks are nervous.
Imagine you just landed a huge contract with the government to supply temporary staff. They need to hire 50 contractors immediately, you have the contractors, but you have a contract with the government that says they will not pay invoices for 30 days or more and each of your temporary employees need paying at the end of every week. What would the bank think?
Your previous income and cash flow is small in comparison with this new contract and your need to finance has suddenly become vital. You want a bank loan for potentially more than your previous year's income. It is unlikely that loan will be issued just based upon your new contract, they want to see a profitable operating history. Not so for the factor! They are thrilled that you are working with the government, who will always pay their invoices. This is a perfect answer - a solid payer and the promise of more business from you.
Contact us today for your cash flow solution!