What is Invoice Factoring for Staffing Agencies?
Staffing factoring, also known as payroll factoring, is a specialized form of invoice factoring designed specifically for staffing and temporary employment agencies. Staffing companies often find themselves in a dilemma of having delayed payments from clients, yet they must still make payroll on a weekly or bi-weekly basis.
Factoring aims to solve that dilemma by providing staffing companies with immediate cash flow and working capital. The staffing company factors or sells its invoices at a discount and receives a cash advance for a portion of the invoice value. Staffing company factoring is a form of accounts receivable financing.
Staffing invoice factoring helps agencies manage seasonal swings by providing a reliable source of funds. Invoice factoring services help staffing businesses convert outstanding invoices into cash before receiving payment from clients, enabling them to meet their financial obligations.
How does Staffing Factoring work?
Payroll factoring involves collaborating with a third-party financial institution, commonly referred to as a staffing factoring company or factor. The factoring company advances cash based on the invoice’s value and charges a small factoring fee.
The invoice factoring company owns the invoice and collects payment from the client of the staffing agency. Once the client pays the invoice, the factor releases the remaining amount to the staffing agency.
Factoring companies often advance between 80% and 95% of the invoice value to provide immediate working capital. The discount rate, also known as a factoring rate, typically ranges between 1% and 5%. Some factoring companies offer weekly factoring rates lower than 1%, and a few even provide 100% advance rates. Most companies that factor invoices can receive funds within 24 to 48 hours after the approval is received.
Factoring for Staffing Companies: Process & Example
Once a staffing firm has a factoring agreement, the staffing factoring process goes as follows:
- Supply staff to your clients and issue invoices for the hours worked.
- Send the invoice & staff timecards to the factoring company.
- The factoring company approves the invoice and purchases it at a discounted rate.
- The factoring company then sends cash based on the advance rate.
- The staffing agency uses the advance to cover payroll.
- The factoring company waits for your client to pay them.
- After receiving payment, the factoring company deducts its fee and releases the remaining balance to the borrower.
Let’s look at the process with a simplified example.
ABC Staffing Agency supplies administrative and IT staff to large companies. Companies pay their invoices at 30-day intervals, but payroll is due every two weeks. The staffing agency enters into a factoring agreement with the following terms:
- Advance Rate: 95%
- Discount Rate: 2%
ABC sends invoices totaling $150,000. The factoring company applies the 2% discount and purchases the invoices for $147,000.
Instead of sending the total purchase amount, the factoring company applies the 95% advance rate and wires a cash advance for $139,650. ABC receives the wire transfer within 24 to 48 hours.
The staffing agency then uses the money to cover payroll. The factoring company puts the remaining $7,350 into a reserve account and waits for the client to pay their invoice.
Once the client pays, the factor releases the remaining amount minus any additional fees. The process repeats monthly, ensuring ABC has enough working capital to cover the biweekly payroll.
What to look for in Staffing Factoring Companies?
Finding the best staffing factoring company for your business requires some research. Every factoring company differs in its payroll funding fees, requirements, and additional services.
The best factoring companies for staffing agencies are transparent about their fees and offer advances on invoices. Evaluating the requirements and terms of different factoring companies can save time and trouble in the long run.
Factoring Fees
Factoring fees include the factor or discount rate, as well as additional fees such as origination or early termination fees. Some factoring companies charge fees, including a transfer fee, an invoice upload fee, and a lockbox fee, among others. Factoring rates for staffing companies typically range from 1% to 5% of the total invoice amount.
Factoring companies determine the factor based on how long it takes for clients to pay. So, if your staffing agency invoices clients on net-30 terms, you’ll get a lower factor rate than 45, 60, or 90-day invoices.
Industry-Specific
Some factoring companies specialize in serving specific industries. For example, many factors specialize in transportation factoring, as the trucking industry uses factoring more than any other industry.
The best staffing factoring companies offer factoring services specific to the staffing industry. For example, some providers provide comprehensive payroll services as a one-stop solution for all your payroll needs.
Recourse vs. Non-Recourse
Recourse factoring means the company has recourse if a client doesn’t pay. The invoice seller must repurchase bad debt invoices.
Non-recourse factoring provides protection if a client doesn’t pay for a specified reason. For example, most non-recourse factoring agreements include bankruptcy protection.
Non-recourse financing is more expensive, as the factoring company assumes a greater risk. It’s generally not necessary in staffing factoring, as the invoices submitted are for work that has already been performed. Many factoring companies prefer staffing firms for this reason.
Notification Factoring
Some factoring companies notify your clients when they purchase invoices; others don’t. The notification makes it easier for the factoring company to collect payment, but some staffing firms don’t want to notify their clients. This is a crucial consideration when selecting a factoring company.
Whole Ledger, Partial, or Spot Factoring
One thing to consider is how much of your accounts receivable you want to factor. Some companies require whole ledger factoring, meaning you must factor all your invoices.
Other factoring companies only require you to factor a set percentage of invoices. Some companies offer spot factoring, which allows you to upload single invoices as you process them.
Minimum Volume Requirements
Many factoring companies have minimum monthly volume requirements (measured in dollars). If a business fails to meet the minimum monthly volume, it faces increased fees or even termination of the factoring agreement.
Who qualifies for Staffing Agency Factoring?
Temporary staffing firms, permanent placement agencies, and recruiting firms can all qualify for staffing invoice factoring. Many staffing companies qualify for factoring, regardless of their credit history or the duration of their business operations.
Approved businesses we work with typically meet the following minimum qualifications:
- Annual Revenue: $250k+
- Credit score: 550+
- Time in business: 1+ years
How to apply for Staffing Company Factoring:
Follow these instructions to apply for payroll factoring through United Capital Source.
Step 1: Make sure your customer is reliable
Factoring invoices only works when your customers pay their invoices on time and in full. Ensure your customers will pay.
Step 2: Gather your documentation
When you apply, the factoring company needs to review the following documents:
- Driver’s license.
- Voided business check.
- Bank statements from the previous three months.
- Business tax return.
- Accounts receivable aging report, Accounts payable report, and debt schedule.
Step 3: Apply
You can complete our one-page application or call us to apply. Either way, you’ll need to provide the information above and the invoice amount you want to sell.
Step 4: Speak to a representative
Once you apply, one of our representatives will reach out to discuss your staffing business and the costs and terms of factoring. You’ll get an upfront breakdown of all costs, so you don’t have to worry about hidden fees.
Step 5: Receive approval
The entire process takes about two weeks to finalize. Funds will be deposited into your bank account 1-2 business days after completing the application process.
What are the advantages of Factoring?
Staffing factoring converts unpaid invoices into working capital, helping your agency meet payroll. It’s not a loan, and you don’t incur any debt.
Since factoring companies determine approval based on your customers’ credit, not yours, it’s much easier to get approval for factoring than for a traditional bank loan. Many younger businesses or those with bad credit use factoring as a financing solution.
The factoring company acts as your accounts receivable collections department. For some staffing businesses, the factoring company saves time and money spent chasing down payments.
What are the disadvantages of Factoring?
The most significant drawback to staffing factoring is the cost. Most near-term financing solutions carry higher interest rates or fees than long-term business loans.
Factoring companies decide fees based on how long customers take to pay their invoices. For example, 60-day invoices get lower rates than 120-day invoices.
Pros & Cons:
Pros:
- Turn unpaid invoices into cash.
- Easier to qualify for than traditional small business loans.
- You can use the funds to cover payroll for temporary staff.
- Invoices and receivables are treated as collateral.
Cons:
- Higher rates & fees than traditional loans.
- Fees are based on the time it takes customers to pay their invoices.
Frequently Asked Questions
Here are the most common questions about invoice factoring for staffing companies.
Why do Staffing Agencies use Factoring?
Invoice factoring services offer several advantages to staffing companies. Many startup staffing companies utilize factoring services because they lack the financial stability to meet payroll demands consistently.
Early Access to Working Capital
Staffing agencies can access funds from factoring much faster than traditional bank loans, due to the less strict qualification criteria. The unpaid invoices in a staffing agency’s accounts receivable are an asset. Factoring those invoices converts that asset into working capital sooner than waiting for the client to pay. Early access helps establish reliable cash flow and serves as a lifeline to staffing firms struggling to make payroll.
Making Payroll on Time
The primary advantage is ensuring the staffing agency can make payroll on time. Whether the agency pays biweekly or weekly payroll, the money owed to staff is due before the agency receives payment from the client. Staffing factoring closes that gap and enables the staffing firm to pay its employees. It also allows companies to take on more clients and employ additional staff. Factoring ensures timely payroll for employees, which is essential for maintaining morale and productivity.
Can I get Staffing Factoring with bad credit?
It is possible to get approved for factoring even with bad credit. Since the payment comes from your clients, staffing factoring companies look more at your clients’ credit scores than yours.
Most factoring companies have low credit score requirements, while others have no requirements at all. The key is ensuring your clients are reliable, which is generally the case in staffing. Factoring companies typically perform credit checks on your customers, but not always on your business. In the case that you can’t get a factoring approval, there are other bad credit business loans available for you to choose from.
Is Staffing Factoring right for my business?
Staffing agencies often experience cash flow difficulties due to late-paying clients. Factoring helps fill cash flow gaps for smooth operations. Immediate capital can be a reliable solution for achieving consistent cash flow and growth opportunities.
However, the cost won’t be worth it if your staffing agency can meet payroll without factoring in these costs. The question comes down to whether liquidating your invoices to cover payroll justifies the money you lose on the discount rate and factoring fees.
Staffing Factoring – Final Thoughts
Payroll factoring is a viable business solution for staffing agencies that struggle to meet payroll obligations. Early access to working capital helps ensure healthy cash flow and smooth business operations. It also allows staffing firms to take on more clients and scale their businesses.
Contact us to discuss your staffing factoring options. Our loan experts will review the costs and address any additional questions you may have.
