There is no denying that factoring is the cash flow solution to the staffing industry. However, before learning how factoring is beneficial for staffing agencies, it’s important to understand what this process is all about.
So, what is factoring?
There is a grave misconception about factoring with many people associating the process to acquiring a loan. However, they could not be further from the truth. For instance, in order to acquire a loan, the business would have to provide evidence of collateral and must boast of a good credit history. And, let´s be honest here—it’s extremely difficult to obtain a bank loan. Now, approval for invoice factoring is entirely based on the creditworthiness of your clients and not your payment history. After all, they are the ones who will be responsible for payment.
Factoring is simply a process of withdrawing money from the value of the invoices that are scheduled to be processed in the next month or so. The process of factoring usually comprises of three parties. One of the parties (factor) is involved in purchasing the receivable; the other party that is involved includes the one who sells the receivable. The third party that is involved in this process is the debtor—the one who owes money to the owner of the invoice.
This method is excellent for businesses that regularly face imbalance in sales and cash flow as it allows businesses to receive liquid cash to pay off immediate bills. In a nutshell, the accounting practice of ¨ factoring¨ allows you to receive money immediately from your customer. However, there is a catch to it. In order to get immediate cash from the factoring agency, you´d have to sell your invoices for a discounted rate.
So, how do staffing factoring agencies work?
Well, factoring agencies (like Carter Funding) purchase your invoice receivables at a discounted rate. They then give you a percentage of the face value of the invoices upfront. Now, these agencies are tasked with collecting the invoice receivables. When they collect the entire sum, they then provide you with the rest of the money as stated in the agreement. In the simplest of terms, a staffing agency factoring company purchases invoices in two installments. The first installment covers up to 90% of the receivable. The second installment process only takes place after the company recuperates the entire receivable. They then send you the remainder after taking their share of the factoring fee.
How is factoring beneficial for staffing agencies?
According to reliable reports, staffing agencies are essential to the economic growth of a country. After all, they help provide employment to more than 15 million people annually. Staffing agencies help fill vacant positions in companies across various sectors. Although it’s fairly evident that these agencies struggle with headhunting on a regular basis, there are other backend challenges these companies face regularly that often go unnoticed.
Some of the problems these agencies face on a regular basis include cash flow problems, lack of funds to advertise and market, lack to funds to meet payroll deadlines, and inability to pay their tax obligations etc. Through closer inspection, you will notice that most of the aforementioned problems occur because of lack of funds.
It’s of paramount importance for staffing agencies to have a smooth cash flow to finance their daily operations. And, to make matters worse—staffing agencies can´t be late on their payments. For instance, if they fail to pay their employees, they can get sued and penalized by the US labor department. If they are unable to pay their tax obligations, they can get fined by the Internal Revenue Service (IRS).
Let´s say a worker comes to one of these staffing agencies for a temporary position. They will want to be paid frequently and uniformly. Some of these jobs and tasks may only last for a day or two. Now, the agency´s customers only pay in a month or so. So, how can an agency pay the temporary employees when there is a cash flow squeeze? In most cases, a staffing company will need to be able to pay its employees every week or every other week.
It can take weeks and months for a staffing agency to recruit, train, and place staff in various positions. This means that they will need to wait a while to receive a return on their investment of time and resources. Of course, these workers will also need to be paid regularly. During this time, there will be operational costs and the staffing agencies will also need to invest in advertising and marketing. Without proper advertising, it can get extremely difficult for a staffing company to recruit new, qualified, and exceptional employees. The agency will also need to pay their rent.
It’s definitely not easy to keep up with payroll and bills in the face of delayed income.
What´s the solution?
Approval for staffing agency factoring is entirely based on the creditworthiness of your clients and not your payment history. After all, they are the ones who will be responsible for payment. The factoring process allows the business to operate smoothly, completely eliminating the need to wait for a month or so to receive payments. Carter Funding can provide the staffing agency with the cash flow it requires within 24 to 48 hours of contact. The cash flow can then be used to pay off the workers, helping the agency retain good employees with prompt payments. In addition to that, the agency will also be able to pay off its tax obligations. No longer will the agency have to turn down business because of a client´s long payment term.
Ready to learn more? Give Carter Funding a call today!