What to Look for in a Payroll Factoring Partner
What to Look for in a Payroll Factoring Partner
The wait for customers to pay invoices is frustrating for any business. The frustration grows exponentially for the temporary staffing agency that depends on payment to meet weekly payroll expenses. Providing workers to customers is at the heart of the agency; the inability to pay workers equates to the inability to satisfy customer requests.
This catch 22 situation is easily resolved when the staffing agency partners with a payroll factoring company. Using this type of service helps to keep the cash flow steady without taking on more debt to pay expenses.
The Importance of Payroll to a Staffing Business
With most B2B transactions, the payment terms are usually 30 days from the date of invoice. In the staffing industry, however, billing occurs immediately and requires payment upon receipt. This is in large part due to the nature of the temporary staffing industry.
The customer receives immediate benefits of having workers fulfill certain duties. Those workers expect to be paid much sooner than 30 days. Therefore, the staffing agency must have enough cash to meet the weekly payroll. If not, the agency will not keep the best talent for their clients’ needs.
At the same time, the staffing agency wants to maintain a good working relationship with its clients. Eventually, clients pay, but just not always in time to ensure the agency has a healthy cash flow.
The result is not having enough funds to make payroll along with other operational expenses. Generally, this leaves the staffing agency with the choice between making payroll and recruiting expenses to hire more workers to fulfill clients’ requests.
Expecting staffing associates to wait for their paycheck is not a reasonable expectation. Although some might bewilling to wait, most expect to be paid as promised. It is a breach of the employer-employee contract in failing to pay employees when expected. Missing payroll can cause staffing agencies to lose valuable workers, and as a result, valuable contract with clients.
How Payroll Factoring Works
A staffing agency’s inability to make payroll not only hurts its relationship with current employees, but it also can significantly damage the agency’s reputation for hiring and retaining strong talent.
Potential future hires will be reluctant to sign on with the agency for temporary assignments if they believe they will not get paid on time. Therefore, the staffing agency will need to consider alternatives to simply paying its associates late.
A favorable solution that allows a staffing agency to meet payroll and maintain relationships with clients is payroll factoring. Essentially, this process allows the staffing agency to sell some or a majority of its invoiced accounts to a factoring company for a percentage of the value of the invoices.
This gives the staffing agency cash on hand to meet payroll expenses on time without the extended wait for clients to pay the invoices. Unlike a bank loan, the staffing agency is not required to put up collateral for an approval. The value of the invoices serves as collateral.
Once the factoring company approve the request, the staffing agency has immediate cash to fund payroll and other expenses related to having a successful company.
4 Essential Qualities of a Payroll Factoring Partner
This fairly simple process works best when staffing agencies partners with a payroll factoring company that understands the nature of the industry. There are many factoring companies, yet not all are right for the temporary staffing industry.
Taking a one-size-fits-all approach to accounts receivable funding may not work for every agency. Knowing what to look for in a factoring company will help staffing agencies make the best financial decision for their payroll needs.
Below is an overview of four essential qualities to look for that will help narrow the selection process.
- The factoring partner has a trustworthy reputation.
The reputation of a staffing factoring company is critical in the selection process. Reviewing information on the company’s website is one thing; speaking with colleagues in the industry is even better to gauging which factor actually “gets” what the agency needs.
A staffing agency should determine if the payroll factoring company really has the industry experience and financial strength to serve its needs. A demonstrated track record for funding payroll successfully is a must.
- Seek a partner with industry knowledge and experience.
Payroll Factoring companies with longevity will have a proven track record of successful payroll funding. Well-established staffing factoring partners will have 10 years or more in the business. This demonstrates the company’s financial stability throughout different business cycles.
A solid understanding of staffing agencies’ unique financing needs is essential to have in a financial partner. This includes factors that can manage these needs across a wide range of staffing industries. Whether medical, IT or administrative temporary staffing, there should be no question that the factor has a quick turnaround to deliver the cash that an agency needs.
- Expect an offer of competitive rates and flexible terms.
Competitive factoring rates and flexible terms are very important for staffing agencies that are having cash flow issues. The payroll factoring partner should not make things harder, but rather, their purpose is to improve cash flow problems.
Staffing agencies should compare different companies to determine what is considered an industry standard rate. What is fair in one industry might be unreasonable for temporary staffing agencies to manage. Some factoring companies offer low rates, but that could include hidden fees and lengthy terms that obliterate the original low rate.
Flexible terms should enable the staffing company to choose which invoices to factor. Other terms such as fees and conditions of payment should be included in any contractual agreement before money is provided for the value of the invoices.
- A good factoring partner includes additional services.
Lastly, a good partner offers optional services that help to support other needs staffing agencies may have related to invoicing. Examples of this include back office support services, accounting systems and credit checks on potential clients’ ability to pay.
Choosing a factoring company requires careful consideration. A payroll factoring partner that does more than provide funding is ideal. In their haste to get fast cash, taking a few extra minutes to weed out factors with less than stellar track records will ensure agencies hire a dependable company.