How Staffing Factoring Works and Helps Your Business
As the person in charge of making sure all the temporary employees get paid, it’s your job to pull money from somewhere.
Your job can get difficult when you have hefty accounts receivable on the books, as too many outstanding invoices can lead to a shortage of working capital.
Invoice factoring is a solution to this problem. Thousands of staffing agencies use invoice factoring to cover payroll when their cash flow isn’t enough.
You can accelerate payment on your outstanding invoices to get cash to cover employee expenses.
Gone is the stress of waiting for reimbursement so you can pay your workers. Instead, you can turn time cards into invoices and invoices into cash with staffing factoring!
1. Staffing Factoring Explained
You’ve heard of invoice factoring, an alternative billing solution that gives you working capital in exchange for your outstanding invoices.
Staffing factoring works similarly but is designed for temporary staffing agencies and other businesses in the staffing industry.
Staffing agencies typically invoice businesses after they’ve provided their client with temporary staff. The agency pays the staff and is reimbursed later for payroll and any fees.
The agency often has to wait months for reimbursement, though.
Staffing Factoring Can Get You Paid Faster
You need to fund your day-to-day operations in between invoice collections. How can you pay the staff you hire and cover your expenses without taking on debt?
That’s where staffing factoring, also called “payroll factoring,” can help. Invoice factoring services accelerate your payment in exchange for a small fee, giving you immediate access to working capital.
Instead of waiting for the client to pay their invoice, which is typically 30, 60, or 90 days, you get the cash you need to cover your operating expenses.
Companies that provide this service are known as “factors.” They work on both business-to-business (B2B) and business-to-government (B2G) contracts.
Staffing Factoring By the Numbers
Watch out for certain numbers in your operating agreement. Every transaction will include a factoring fee, usually 1% to 3% of the total invoice amount.
The rest of the invoice is paid to you in two parts:
- The initial payment, based on the factor’s advance rate (somewhere around 80-90%)
- The rest, minus fees, after the customer’s payment processes
There’s no need to chase clients down for outstanding invoices or wait until they decide to pay you before you recoup your losses.
2. The Steps Involved in Staffing Factoring
Payroll factoring is unique in the business financing world. Because you’re paying staff you hire to work for another company, you’re responsible for ensuring they get paid, even if you don’t actually write their checks.
With staffing factoring, you can cut out some of the overhead and risk.
The factor determines the client’s creditworthiness. As long as they accept the invoice and you opt for a company with non-recourse financing (more on this below), this part of the expense is out of your hands.
How to Use Staffing Factoring
Here is what you can expect a transaction to look like in a staff payroll factoring partnership:
- You determine each client’s payroll limits for the week based on their guidelines and your temp staff.
- Each employee records their work hours on a time card and turns them in to you at the end of the week.
- You turn the information from their time cards into an invoice.
- You submit the invoices to your chosen factor-funding company instead of your client.
- When your factoring partner accepts the transaction, you receive the advance on the invoice.
- When the client pays the factoring company, you receive the remaining amount minus any agreed-upon fees.
It really is that simple. Much of the headache is taken away from your role in the staffing company.
Recourse vs. Non-Recourse Factoring Companies
It’s essential to watch out for the type of factoring a company provides before you enter into an agreement with them.
Let’s break down the difference between recourse factoring services and non-recourse factoring services.
Recourse financing means that if an invoice isn’t paid, you as the staffing business are now responsible for paying the total amount to the factor.
You’ve taken on the liability for the client, and they failed to pay, so it becomes your job to do so.
With non-recourse factoring, the factor has determined the client to be worth the risk. They take the burden of responsibility out of your hands and into their own.
If the invoice isn’t covered, the factoring company doesn’t get paid, as they’ve accepted the liability.
There are benefits to both types of factoring. There’s more risk in non-recourse transactions, so factors usually offer better terms to businesses that opt for recourse factoring.
You can decide on a per-client basis if your factoring company offers both options.
3. Benefits of Staffing Factoring
Now that you know what staffing factoring is and how it works, the next step is to determine if it’s right for your business.
Any type of outside funding should be considered carefully, as it will always come with a cost. Just as you would carefully deliberate bringing in outside investors, you should weigh all potential outcomes of a factoring agreement.
Do the Advantages Outweigh the Costs?
Submitting payroll expenses through a factoring company has a lot of advantages for staffing businesses.
Consider these aspects of partnering with a factor and whether they would make the transaction cost-effective for you:
- You’ll have working capital on hand for payroll funding.
- There’s less drain on your cash flow, freeing up funds for other expenses and investments.
- Your in-house employees will have less work when it comes to things like clearing the accounts receivable and collecting outstanding invoices.
- There are no loans or debt involved.
- There’s no need for collateral or credit checks on your business since the client is the one evaluated for creditworthiness.
- You don’t need a minimum credit score to get approved.
Factoring is also one of the easiest types of financing to get approved for. Approvals usually happen quickly, too.
Does Your Business Qualify for Staffing Factoring?
It’s not a loan, so a bank won’t put your business under the proverbial microscope to examine its financial stability.
However, some staffing factoring companies are choosy about the companies they partner with as far as longevity and consistency go. If you just started your business, you may have difficulty qualifying for factoring.
Also, If your clients are chronically late payers, the factor has the right to turn the invoice away.
Don’t worry, though; most companies qualify for staffing invoice factoring. Factors understand that the time cards involved serve as guarantees of work rendered, and they know that the employer is likely to pay for the hours because their employees have already done the work.
This “guarantee” is what factors look for when they choose to approve or deny a submitted invoice.
Staffing companies that need financing but don’t want to take out traditional small business loans can benefit from factoring.
4. How to Know if You Should Use Staffing Factoring
Could your staffing agency benefit from a little extra cash flow?
If so, you’re not alone, and it doesn’t mean there’s a problem with your business management skills.
It’s not uncommon for companies like yours to have a lot of gaps in working capital. You’re paying temporary employees to work, then waiting weeks or months to get reimbursed by the business that “hired” them.
If you have a lot of temporary employees or are looking to increase your client load, factoring can help. Your agency can cover payroll without impacting the rest of the business expenses.
There are a few characteristics that most staffing agencies that use factoring have in common. Ask yourself these questions to determine if the cost of payroll factoring could be a worthy investment for your business:
- Does your agency have a consistent flow of invoices but a lengthy time between invoice submission and payment received?
- Do you have a large number of temporary employees?
- Do you plan on growing and expanding your company in the near future but are concerned about the out-of-pocket expense of new clients?
If you answered “yes” to any of these, your company is a good candidate for staffing factoring.
5. Why Now Is the Invoice Factoring Company of Choice
Ready to take the next step and find the best company for your factoring solutions?
Check out Now’s invoice acceleration program. It’s an innovative factoring solution for small and medium businesses without hidden fees and frustration.
With NowAccount Business Factoring, your staffing agency can reap the benefits of simple payroll factoring.
How NowAccount Works
Once you’ve delivered the goods or services (employee timesheets, in this case) to your client, you submit the invoice to NowAccount through your online portal.
The factor processes, confirms, and approves the invoices, upon which you receive 100% of your invoice amount, less the service fee.
Fees are a flat rate of 3-5% of the invoice amount — no hidden processing costs or extra “handling” charges.
Your client pays Now directly, and the transaction is over. You won’t have to pay a loan back or worry about your client paying the factor. Now’s agreement is based on non-recourse factoring, putting the risk in their hands rather than yours.
Our clearly defined payment terms let you know exactly what to expect, and the easy online application gives you fast approval and access to funds, often within 24 hours.
Other funding solutions don’t offer these same benefits. Small Business Administration loans have months-long turnaround times, and lines of credit will have you paying high-interest rates.
When you decide to use payroll factoring as part of your staffing agency procedures, it makes sense to partner with Now.
See if you qualify for NowAccount today!
One of your responsibilities in managing your staffing firm is to balance the incoming and outgoing cash flow. This can be tough when dozens or hundreds of temporary workers rely on you for a paycheck.
Send the invoices to a factoring company instead of pulling from your company’s working capital to cover payroll. You get the cash to cover employee expenses while keeping your own company funds where they belong: in your bank account.
The benefits outweigh the small fee that comes with factoring services, especially when you work with a company like Now.
No hidden fees, an easy application and factoring process, and non-recourse terms make it a smart financial decision to put your staffing overhead in our hands.