What is Payroll Funding?
Temporary staffing agencies have many financial obligations directly connected to running their business. From paying workers’ compensation insurance to marketing service to potential clients, every dollar spent is aimed at keeping the agencies competitively positioned in the industry.
Yet, with all of these expenses, none are as challenging as funding payroll. Ensuring there is enough money to cover payroll and taxes is more important than marketing. Think about it. An agency could host the biggest job fair, add hundreds of candidates to the roster who are skilled to fill client positions.
However, if the staffing agency is unable to pay their associates on time, those highly skilled candidates will go to the competitor that does not have cash flow problems. This presents a challenge for staffing agencies who typically pay associates and vendors weekly. The problem is clients can take 30, 45 or in some cases, 90 days to pay invoices.
How Cash Flow Problems Can Hurt Business
Obviously, this strains the agency’s cash flow and making payroll becomes very difficult. This is particularly true for small of growing temporary staffing agencies. In addition to making payroll, seasonal staffing clients, or even growth opportunities, can also put a dent in the agency’s cash reserves.
Generally speaking, there are two primary options for the staffing agency that has cash flow problems. First, they could apply for a business loan in hopes of being approved. The second option is to use payroll factoring.
Many temporary staffing agencies are valuing the benefit of choosing payroll funding with a factoring company like Flexible Funding. This financial instrument, which is covered at length below, is different from bank loans.
Staffing Agencies Unique Dilemma
Temporary staffing agencies that bill clients often find invoice factoring is an effective way to address cash flow issues. The business model is for clients to pay after job vacancies are filled and the associates have actually worked.
Because of weekly payroll, associates are paid well before clients decide to pay the invoiced hours. Not only are temp agencies paying for advertising and recruiting costs upfront, they must also dip into their funds to make payroll. Waiting 30 days or longer makes this virtually impossible. Additionally, staffing agencies are paid per hour based on the number of hours associates work for clients. This payment structure does not eliminate all the expenses that come with running a successful employment agency.
Many of expenses such as rent, supplies and payroll cannot be put off. Therefore, securing money as soon as possible becomes an urgent task. While each employee needs to be paid, rent, utilities and communication services are also important to running the business.
When the agency has to advertise job openings or need supplies, waiting for approval on a business loan is not practical. The sooner money is available, the better for the agency, associates and the clients they serve. This makes invoice factoring the ideal choice.
Payroll Funding 101
The benefits of partnering with a factoring company to meet payroll include:
- Flexibility for growth
- Reliable cash flow to meet expenses
- Pay temporary associates on time each week
Essentially, payroll factoring allows temporary staffing agencies to sell client accounts receivable for a nominal fee. In return the factor gives the temp agency cash to meet payroll and other necessary expenses. Most factors operate like a bank line of credit.
Temporary agencies can draw on the invoices when needed by only getting the amount required to meet payroll. Financing fees only apply to what is borrowed, not the full value of the invoice. Furthermore, using invoice factoring to generate cash means the money is secured quickly.
In some cases, funding for a percentage of the invoices’ value is available within 24 hours; the process might take a little longer for first-time customers of this financing option. Typically, they can still expect to receive the money within seven days or less.