To Bank or Not to Bank?

Cash Flow. For many staffing firms, these are dreaded four-letter words. There are few other industries in which your product (your temporary workers) has to be paid for (over and over again) before your customer pays you.

In fact, the need to meet payroll in advance of collecting receivables has put many staffing companies out of business. Bad debt, a slow-paying customer, or even rapid growth can all tax your working capital beyond its limits.

When you started your staffing agency, obtaining a line of credit from a bank to help with cash flow may have been a logical choice. Today, staffing owners can take advantage of the increased specialization in the lending and funding world to achieve greater flexibility and, in some cases, a more cost-effective solution to their business needs.

Let’s look at the some of the ways to address your cash flow needs.

Option 1: Traditional Banks

Banks really don’t understand the industry. We don’t have brick-and-mortar or other tangible assets they can lend against. While many banks will offer a line of credit supported by receivables, they will typically only lend up to 75% of the receivables’ balance, up to a fixed limit. And if you don’t have a multi-year track record as profitable business (and a strong balance sheet), they won’t touch you at all.

Most staffing firm owners perceive bank financing as  less expensive, but in reality, the total costs can be much higher and difficult to gauge; there are usually application fees, examination fees, unused line fees and required covenants that you will be required to hold to and report on. Beyond that, there are certain circumstances where bank financing will not work:

  1. When you are growing very quickly. The unfinanced receivables that the bank doesn’t cover has to be funded somehow
  2. When you need to take on a new major account. Banks like to have a history to rely on.
  3. When you have customers (like Fortune 500 companies) that take 60, 90 or even more days to pay. Most banks will exclude receivables that are in excess of 60-90 days.
  4. When a major account defaults on your receivable.

In all these situations, you’re likely to need more than 75% of your receivables balance in working capital in order to keep your doors open.

PREMIUM CONTENT: North America Staffing Company Survey 2021: Frequency of pay and methods of pay for internal staff and temporary workers

Option 2: Credit cards and Personal Lines of Credit

While credit cards and personal lines of credit have been used by entrepreneurs everywhere to fund startup operations, they are generally inadequate to support the growth of a staffing business. The cash flow demands are simply too great and the risks too high.

If you are in a rapid growth situation, none of these solutions will allow you to scale your payroll, and ultimately, your lack of access to working capital will put your business at risk.

If you need financing because of a slow-paying or high-risk customer, these options could put your future personal financial well-being at risk.

Option 3: Funding Companies

A funding company provides working capital (and often other services) to businesses. They will purchase your receivables at the time you send your invoices, so you get immediate access to the cash you need to pay your payroll. The funding company then takes care of collecting the receivables, and they will charge you a percentage of the invoice value for their services.

While some funding companies fund 100% of your receivables, a typical funding company will give you instant access to 80-90% of your receivables. They hold back the remaining percentage until the receivables are actually collected. Once collected, they will pay you the remaining balance, less their service fees.

Fees can range greatly, and the cost will vary by provider and the riskiness of your business (i.e., the specialty niche markets you serve, the type and size of customers you have, and your firm’s credit history).

The biggest advantages of funding companies include:

  • Immediate access to cash to finance payrolls.
  • Greater scalability – no limit to your growth.
  • A partner in assessing customer credit and managing collections.

Beyond Cash

While options one and two get you access to a line of credit that can be used to fund payroll or for other purposes, cash is all you get.

Back office services. In addition to funding, a premier provider offers a full range of back-office support services that relieve staffing firms of significant amounts of administrative burden, so they can focus more time and energy on sales and recruiting.

These additional services save time, ensure accurate processing of invoices, payroll and payroll taxes, and keep you in compliance with federal and state payroll regulations.

Cash flow is essential to your growth. When deciding on a bank or funding company, look for a firm that specializes in the staffing industry — one with a long history of supporting organizations that are similar to yours. Look for a firm that is committed to helping you become more successful.

Lenny Tierney

Lenny Tierney
Lenny Tierney is founder, president and CEO of Madison Resources.

Lenny Tierney

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