The economy took a nosedive in 2008-2009, and as a result, companies were reluctant to hire permanent employees. Instead, they were turning to temporary staffing agencies to fulfill their needs. Since that time, the staffing industry has seen a significant increase in the level of activity. Even with concerns of an economic slowdown, a strong labor market and low unemployment rates continue to drive demand for staffing services. This increase is good for business, but creates a cash flow problem for staffing companies that do not have adequate cash reserves.
Typically, employees must be paid weekly or bi-weekly, but staffing companies must wait 30-60 days to collect from their debtors. This causes a drain of cash, especially when staffing company owners are trying to grow their business and meet the demands of their current clients. They may also miss out on the opportunity to bid on new contracts because there isn’t adequate cash flow.
Another choice for staffing companies that face this type of cash crunch is factoring, also known as A/R financing. Since the staffing company’s primary asset is the people they contract out, it does create an accounts receivable that can be leveraged to generate the working capital they need to pay employees and operating expenses on time. Factoring is the sale of accounts receivable or invoices at a small discount to obtain immediate cash. This type of financing gives businesses the ability to ensure growth without diluting equity or incurring debt. It can be used to bridge the gap between the time the service is delivered and the time the invoice is paid and helps in managing the in-flow and out-flow of cash for staffing companies that want to capitalize on the prospects that lie ahead for their in-demand service.
Getting Qualified for Financing: Staffing Companies
While factors are concerned with the long-term viability of the company, their primary focus is on the debtor strength and the debtor’s ability to pay the invoices being purchased, as well as the character of the management team. While traditional funding sources, like banks, may focus on the staffing company’s past, factors look at growth opportunities that may come up in the future. A factoring facility is easy to qualify for and can quickly create immediate working capital availability to meet cash needs.