When the Banks Say No: Financing a Staffing Startup

To run a successful staffing business, you need to have a sufficient pool of employees ready to work. But if your customers are taking up to 45 days or more to pay, how will you make payroll each week?

While your first instinct might be to turn to a bank, there’s a high probability that your loan application will be denied. There are many reasons that small businesses get turned down by the banks. But for a young staffing firm, low or nonexistent revenue combined with a lack of business history is usually the culprit.

While you might feel that you are out of options, that isn’t necessarily the case. Payroll factoring is a popular alternative that can provide your staffing business with the funds it needs to sustain and grow.

What is Payroll Factoring?

Payroll factoring provides a cash advance against your unpaid receivables. Rather than waiting 30 days or more to get paid, you can often see your invoices funded in as little as 24 hours. This quick influx of capital will allow you to make payroll when cash flow is tight.

How does it Work?

The process of factoring your staffing invoices is simple. When you have a receivable that you need funded, you submit it to your factoring company for approval. Prior to being approved for factoring, the lender will check your customer’s credit and business history. They will also check that there are no outstanding disputes over any aspects of the invoice. This is to manage the risk your factoring company is undertaking.

Once everything checks out, you’ll be advanced a percentage of the invoice, usually within 24 hours. The amount that is advanced will vary by lender, and the invoice amount or customer profile can play a role in determining it. You can expect initially receive 80-90% of the receivable up front.

Next, your customer will be notified to remit payment directly to your factoring company. When the payment is eventually received in full, you will receive the remaining balance minus a factoring fee.

Factoring fees range from 1%-4% or higher. In some cases, you’ll be charged an additional .5%-1% weekly if your customer takes longer than 30 days to pay. While the cost of factoring is much higher than traditional financing, it is much easier to qualify for than a loan.

The Benefits of Factoring

The primary reason that staffing firms choose to factor is their inability to secure a business loan. Factoring is based almost entirely on the customer’s financials and credit history, which means that even a startup staffing business can qualify. Some other benefits are:

• No monthly repayment schedule, Factoring is a transactional product
• Use as needed, or as cash-flow issues arise
• Can be funded in as little as 24 hours
• Allows a business to quickly scale operations

Payroll factoring is a flexible tool that can help fund startup staffing companies, young firms experiencing rapid growth, or established businesses experiencing cash flow difficulties. While the associated costs are much higher than traditional financing, factoring is easy to qualify for, and provides for near instant cash-flow injections when they are needed the most.