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What is staffing factoring?
To operate efficiently, staffing firms and temporary employment agencies need working capital to cover recruitment, hiring, onboarding and payroll expenses. However, clients typically have 30 or longer net terms while payroll must be made every two weeks. To close the gap between cash inflow and outflow, staffing firms can rely on factoring.
Factoring is the sale of accounts receivable at a discount to a third-party company, known as a factoring company or, simply, a factor. Alternatively, the receivables can be purchased by a bank. Using factoring, invoices can be monetized in 2 to 3 days.
The factoring company assumes the responsibility of collecting payments on the invoices it factors, either on a permanent or temporary basis – and keeps a small percentage of the total invoice amount as their fee. A factoring company can buy just a few of your invoices, known as spot factoring, or all of them, known as whole ledger or full-turn factoring. To learn about the cost of factoring, please visit our Small Business Factoring page.
How does it work?
Staffing invoice factoring works in four simple steps:
- The business provides a factor with a copy of the invoice that was sent to the client (account debtor)
- The factor verifies the invoice and runs a credit check on the account debtor
- The factor advances a portion of the outstanding amount
- Once the invoice is paid, the business gets the remainder minus the discount rate and any additional fees
Staffing is among the industries with the highest advance rate. Contact Business Factors today to get a quote.”
Advantages of staffing factoring
Benefits associated with factoring for staffing agencies include:
- Obtaining working capital even if they face a challenging financial situation associated with lack of growth or having a limited credit history, for example. Factoring, unlike lending, relies on the creditworthiness of the staffing agency’s clients, not its own
- Ability to take on new clients and serve existing ones without having to worry about paying new talent on time
- Financial freedom to hire many seasonal workers in a short period of time
- Ability to pay competitive salaries and attract top professionals such as software engineers and developers, database administrators, IT professionals, nurses, medical technicians, physicians and others
How much does it cost?
The fee that a factor charges for their services is called a discount rate. The discount rate depends on the dollar amount and number of factored invoices, credit quality of your clients and your industry, among other factors. On top of the discount rate, factors can charge fees associated with due diligence, termination of the contract, monthly minimums, etc. A part of the invoice can also be held back as a reserve. As such, the advance rate – which is what a business owner actually gets when the invoice is factored – ranges between 70% and 96%.
Once the invoice is paid, the reserve – minus the discount rate and other fees – is returned to the client. Staffing is among the industries with a high advance rate.
Fee structure varies by factor. Some may not hold back the reserve and not charge any other fees, aside from the discount rate.
Business Factors can help staffing agencies to monetize invoices in 2-3 days with competitive rates that work with any budget. We offer an online account management system and back office assistance.”
Below is an example of a factoring arrangement:
- Invoice amount: $10,000
- Advance rate: 90% or $9,000
- Reserve: 10%, or $1,000
- Discount rate: 2.19%, or $219 every 30 days
- Type of arrangement: Non-recourse
In this scenario, the client would pay $219 per month to get the invoice factored. If the invoice is collected after two months, the client would pay $438 and get $562 back from the reserve. The arrangement is non-recourse, meaning that there is no chargeback to the client if the invoice is not collected.
Alternatives to factoring
There are several alternatives to factoring. They include asset-based loans and working capital loans, or merchant cash advance (MCA). As mentioned on our Cash Flow Loans page, businesses should carefully read MCA agreements to ensure they are not agreeing to predatory clauses, such as a confession of judgment. Contact Business Factors today to find out the best working capital option for your business or get a quote .
Why is Business Factors is the best choice for staffing factoring?
Business Factors provides the following benefits:
- Fast financing in 2-3 business days
- Competitive rates that can work with any budget
- Simple 30-minute application process
- Online account management system for transparent receivables processing
- Assistance with back-office receivables and invoice handling so you can spend more time growing your business
- Friendly customer service and knowledgeable staff to guide you through the staffing factoring process
Staffing invoice factoring can be a good alternative for temporary employment agencies that need to obtain working capital fast to finance payroll or offer competitive salaries to top talent, such as IT professionals or nurses. Unlike lending, factoring relies on the creditworthiness of the staffing agency’s clients. Therefore, it is a good solution for agencies with a short or problematic credit history. The fee that a factor charges for their services is called a discount rate. The discount rate depends on the dollar amount and number of factored invoices, credit quality of your clients and your industry, among other factors. The amount that the factor advances is called an advance rate and it ranges between 70% and 96%. The staffing industry usually enjoys a higher advance rate than retail, for example, because service invoices are harder to dispute. Alternatives to factoring include working capital, cash flow or asset-based loans, credit cards or merchant cash advance. Contact Business Factors to find the most fitting option for your business.
Representatives are available 24/7 to answer any questions you may have on accounts receivables factoring. Call us today at 800-672-3844.