Staffing Companies

Payroll Funding for Staffing Companies

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Staffing companies face unique working capital challenges. Nearly all staffing firms face cash crunches. This is primarily the result of the payment terms that the staffing firm’s customers require at the outset of a relationship. However, long payment terms in itself is not necessarily the issue. Nor is it the cash intensive nature of supplying labor or the lower margins of a service based business.

It’s the inability of traditional lenders to lend to staffing businesses which makes the owners’ and operators’ lives so difficult.

Consequently, many staffing companies rely on alternative financing solutions to improve their financial health. One such solution is payroll funding for staffing companies.

What is Payroll Funding for Staffing Companies?

Payroll funding is a means of infusing cash into a staffing firm in order to supplement the firm’s working capital. More often than not, staffing companies are required to pay employees on a weekly or bi-weekly basis. However, their customers remit payment 15 to 30 to 45 plus days later. This gap between when staffing companies must pay their employees and when payment is remitted by their customers causes enormous strain on cash balances

Payroll Funding for Staffing Companies

Payroll funding is a form of accounts receivable financing that eliminates this cash gap. When the invoice or time sheets are submitted, the payroll funding company purchases the invoice. This action provides the staffing firm the cash needed to pay employees. The payroll funding company then collects from the staffing company’s customers when payment is remitted weeks later.

Staffing Industry Specialists

The Southern Bank specializes in financing staffing firms. Read more about how a staffing company client reduced financing costs by 42.4% in our payroll funding case study.

The Southern Bank’s Payroll Funding Solution, altLINE

Unlike most traditional lenders, The Southern Bank is committed to partnering with small and mid-sized staffing firms. The Southern Bank has a working capital solution for staffing companies regardless of a business’s life cycle.

By partnering with The Southern Bank, staffing firms benefit from:

  • Direct bank funding leading to some of the lowest rates in the market
  • An FDIC regulated lender that puts a premium on customer service
  • The confidence in the marketplace of working with a bank

Whether you’ve been in business for two weeks or twenty years, The Southern Bank is willing to structure a payroll funding solution that meets your needs.

Financing for Staffing Companies

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Running a successful staffing company requires managing multiple priorities, relationships and partnerships. This balance often presents a tough challenge even for seasoned staffing professionals. Staffing companies that find the right employees and reliable partners stand to enjoy greater profitability and growth.

In this post, we’ll address key points related to financing for staffing companies: industry growth trends, lenders offering financing for staffing companies and common reasons a staffing company needs to revisit its financing.

Growth Across Staffing Industry

Companies across the globe are outsourcing job functions at record levels. According to a recent Deloitte survey, businesses expect an increase in outsourcing across all major job functions including IT, Legal, Real Estate/Facilities, Finance, Human Resources and IT. Among the survey respondents, 36% cite planned increases in outsourced finance functions, 32% in human resources functions and 32% in IT. These three categories present the highest future opportunities for outsourcing growth.

Further support of growth across the staffing industry comes from Staffing Industry Analysts (SIA). SIA compiled comprehensive data on measuring the gig economy to capture the growing number of people and expanding payroll represented by the US contingent workforce. According to the research, “an estimated 44 million people took on gig work in the US in 2015 with 29% of all US workers performing gig/contingent work last year. Total spending on gig work in the US was $792 billon.”

These numbers present a promising story for staffing companies. More businesses are turning to contingent or temporary agencies for workforce solutions. A growing number of businesses appreciate the skills, knowledge and flexibility of the contingent workforce. Staffing companies well-positioned to leverage this trend can benefit from the immense growth opportunities.

Staffing Companies Need Capital to Keep Up

Growth-oriented staffing companies require capital to take advantage of the current industry trends. Whether a staffing firm plans to bid for new contracts or seeks areas to invest in for competitive advantages (such as training, marketing or technology improvements), the company needs a dependable source of financing. A partnership with a reputable and reliable financing partner sets the foundation for funding growth opportunities.

Payroll Funding for New Contracts

When a new contract comes in, expenses immediately follow. Most notably, payroll expenses for a staffing firm’s contingent workforce begin right away. The staffing company places workers at the job site and typically starts paying those employees weekly or biweekly. The staffing company fronts the payroll expense until the client receives and pays the invoice.

This lag in time may equate to as long as 30-60 days and causes cash flow problems for many businesses, particularly staffing companies. In this case, additional capital helps to ‘solve the cash flow crunch’ or ‘bridge the gap.’ This type of financing used by staffing companies is known as payroll funding or payroll financing.

Investment in Competitive Advantages

Staffing companies face stiff competition, and investment in competitive advantages can position an agency for growth. Some staffing companies utilize advanced training or specialized programming to enhance the skills of temporary employees.

For example, temporary agencies placing light industrial workers may see training related to hand-eye coordination, equipment operation and stack-and-sort job functions as a worthwhile investment. For administrative and clerical temporary positions, education around new organizational productivity techniques or software training may provide a competitive edge for a staffing company.

Staffing Company Financing Partners

Thus far, we’ve acknowledged growth trends across the staffing industry and addressed why staffing companies need capital. Next, we’ll review the types of financing partners temporary staffing companies turn to and how these differ. In our assessment, we’ll evaluate traditional banks, independent financing companies, traditional payroll funding companies, and specialized staffing lenders.

Traditional Bank Financing is Hard to Find

A bank is typically a staffing company’s first stop for financing. Established staffing companies have an existing relationship with their banking partner, so it’s a natural starting point. While a bank loan or line of credit offers preferred terms and reputational benefits, many traditional banks turn away staffing companies due to a lack of hard assets. Most banks view staffing businesses as beyond their ‘credit box’ or the tightly defined parameters for assessing the risk associated with a borrower. Some staffing companies may be eligible for traditional bank financing, but even then tight limitations exist which we’ll address in a later section.

Traditional Payroll Funding Company

Payroll funding providers present another avenue for a staffing company to access capital. Traditional payroll funding companies offer broad flexibility in who they’ll work with in terms of size and performance level of the company. However, a staffing company pays a substantial premium on the cost of capital when working with a traditional payroll funding provider.

Traditional payroll funding companies bundle multiple payroll services together, so it becomes difficult to know the price of the payroll funding service independent of the other services. Bundled payroll services may include payroll processing, tax processing services, staffing software, credit and collection services and more. A complete payroll solution appears convenient and easy, but upon further analysis the costs to the staffing company are significantly higher than if the company looks to a direct source of payroll funding.

Independent Financing Companies

Independent finance companies offer highly creative and flexible commercial lending options. These companies do not operate under the same rules and regulations as banks and financial institutions, so they can be more lenient in who they’ll do business with and the types of deal structures.

Since independent finance companies work with all types of businesses across all industries, they lack specialization in any particular industry. Only a financing partner with a specialty in the staffing industry understands the unique challenges of a staffing business.

Also, independent finance companies borrow money from another source to lend to businesses, including staffing companies. These funds incur additional costs, so are more expensive for staffing companies than direct sources of funds.

Specialty Staffing Lender with Direct Source of Funds

Here at the Southern Bank, we’re well-positioned to help staffing companies achieve growth and expansion as a direct source of funds and staffing specialized lender. As a bank, our borrowers enjoy access to a direct source of funds. Our bank has a solid deposit base funding our operation, so we do not turn to an outside lender. This equates to cost savings. In a recent case, a staffing company switched its payroll funding to The Southern Bank and  cut payroll funding costs by 42%.

Unlike traditional banks options, The Southern Bank’s staffing division works with staffing companies from the startup stage through those established companies in expansion mode. We offer a broad range of bank financing options for staffing companies, including Payroll Funding, Accounts Receivable Financing and Asset Based Loans.

Most Common Reasons Staffing Companies Finance with Us

The Southern Bank proudly serves an impressive roster of growth-oriented staffing companies nationwide. With each new staffing client who comes aboard, we seek to understand their motivation. The same top reasons frequently come up when a new staffing client answers the question “What circumstances led you to look to us for your financing needs?”

Startup Staffing Company

Launching a startup staffing company requires a sizable initial investment. At a minimum, the upcoming company needs capital for office space rent, technology needs and payroll. Traditional bank financing requires two years of operating history. Between the lack of operating history and lack of assets, a traditional bank simply can’t offer funding to a startup staffing company.

While we are a bank, we are much better equipped to handle and ready to take on financing relationships with startup staffing companies. Our staffing division offers an array of borrowing options for startups seeking to take advantage of borrowing against their accounts receivable.

Line of Credit Capped

Some staffing companies do qualify for traditional bank financing. With at least two years of operating history and solid profitability, a bank may offer a line of credit to a staffing company if the business owner pledges personal collateral. This arrangement may last for some time, however often the staffing company outgrows the line and their borrowing ability is capped. In these cases, when the staffing company goes back to the bank for a line increase they will often be denied.

Many of our clients have experienced this scenario with their primary banking relationship. Their line of credit is capped and their bank can’t lend anything further. We work in tandem with the primary banking partner. We do not seek to take over the primary banking relationship. Our business model solely addresses the financing piece for staffing companies.

Avoid Violating a Loan Covenant

Some staffing companies with traditional bank financing products may operate under covenants. A loan covenant is a condition that requires the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions. Typically, violation of a covenant may result in a default on the loan being declared, penalties being applied, or the loan being called.

In a move to avoid tripping a covenant, staffing companies often look to us for access to capital. Utilizing accounts receivable to fund growth doesn’t require incurring additional debt which is often a restrictive financial covenant in play.

Choosing the Right Payroll Financing Partner

Finding a financing partner who specializes in your industry, can grow with you, and offers competitive rates and services will make a big difference in your future. Many deal structures and financing facilities exist. Be sure to find a partner you who can answer your questions with direct answers. An industry resource, Payrollfunding.com, assembled a list of questions to ask for finding the best provider.

About Us

Here at The Southern Bank, we deliver superior service and financing solutions to staffing companies by:

  • Serving as a direct source of funds. This means lower costs than independent financing companies and traditional payroll funding companies.
  • Being a staffing specialized lender. Our bank has a division dedicated to working with staffing companies to provide the best, most creative and effective financing answers to the staffing industry’s changing needs and demands.
  • Crafting creative and custom solutions. No two staffing companies are identical, so neither should your financing arrangement be. Rather than force a staffing company to fit into a single product, we create financing arrangements tailored to each individual staffing company’s needs.

Contact us today to discuss bank financing options for your staffing company.

Payroll Funding Exit Strategy

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Payroll Funding Agreement

Before beginning a financing relationship with a funding partner, understand the steps required to terminate the relationship if needed before the end of the term. Complex structure and lengthy verbiage make contracts difficult to decipher, particularly payroll funding agreements. Transparency and clarity are “must haves” in your payroll funding relationship.

Circumstances may arise whereby you want to switch your payroll funding partner, including:

  • Desire to unbundle funding from complete payroll solution
  • Lower cost of funds found elsewhere
  • Unhappy with level of service of current funding partner
  • Desire to switch to a staffing finance expert

Several factors relating to early termination you should be aware of include: length of agreement, auto-renewals, window for notification, early termination fees and other penalties associated with terminating.

payroll funding contract

Length of Agreement

The term (length) of payroll funding agreements typically lasts one year. However, terms exist lasting as long as two and three years. Since staffing companies experience business swings and rapid growth opportunities more intensely than many other industries, having flexibility and shorter agreement terms are extremely important. For optimal flexibility, don’t agree to terms longer than one year.

 Notification and Auto-renewal

The agreement term also comes into play with the auto-renewal clause. Most payroll funding agreements automatically renew for another subsequent term if you don’t provide advance notification of your intent to terminate the relationship. For example, if your two-year contract expires in April of 2017 and you miss the window for notification, you are automatically locked in for another two years or until at least April of 2019.

Remain aware of your auto-renewal date, but more importantly be mindful of the window of notification. The industry standard for the notification window lasts 60-90 days, but longer lead times do exist. Consider marking the notification date on the calendar and giving notice to your payroll funding partner to at least open up the possibility for a better deal. If not, you will automatically be locked in for another term.

computer calednar

Early Termination Fee

The reason for a termination penalty relates to the upfront expense the funding partner incurs. Setting up the facility requires time and resources at the onset, so it typically takes the contract term to recover those costs.

A standard early termination fee is calculated as (monthly minimum fee X the number of months remaining in the term). The inputs for that calculation should be easily found in your payroll funding agreement. Another calculation could be (monthly minimum volume X a pre-determined percentage). Make sure you complete these calculations before signing your agreement to understand what it would cost you for early termination. Even with an early termination fee, there may be situations where it’s advantageous or imperative to terminate.

Summary

To recap the most important points of your payroll funding exit strategy:
1. Don’t sign multi-year agreements
2. Identify your notification date for early termination and set up a calendar reminder to revisit the agreement each year
3. Know exactly what it costs to exit your agreement early should you want to go with another partner

At The Southern Bank Company, our successful 80-year banking history exemplifies our commitment to treating customers fairly and with the utmost transparency. Through our altLINE program, we provide competitive and straight forward payroll funding for growth-oriented staffing companies.

Payroll Funding Case Study: Reducing Financing Costs by 42.4%

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Payroll funding is financing solution utilized by many staffing companies. However, with a seemingly endless number of payroll funding providers, each with its own structure and terms, it’s easy for staffing owners to overpay.

With clear pricing and no hidden fees, The Southern Bank prides itself in its ability to provide payroll funding with great service at a low price. In this case study, we provide an example of a light industrial staffing firm that reduced its financing costs and improved customer relationships by making the switch.

Company

Temporary Staffing Firm Specializing in Light Industrial with $5,000,000 in Annual Revenue

Background

An East Coast staffing firm had been utilizing an independent financing company for its factoring and payroll funding needs for several years. At the outset, the relationship made sense, as the payroll funding company had staffing experience and provided invoicing, payroll processing, and collections in addition to financing.

The bundled solution was attractive due to its simplicity and the owner was happy to sign up citing the following reasons:

  • Independent financing partner’s staffing industry focus
  • Simplified, bundled service package that includes back-office support
  • Referral from existing Worker’s Compensation broker
  • Lack of financing interest from local, community, and regional banks

Problems with Independent Financing Providers

While the staffing firm’s agreement with the independent financier helped ease the firm’s cash crunches, other problems soon arose.

Unlike traditional financing, payroll funding providers take a more active role in a borrower’s business. While a bundled solution can be beneficial, the bundled solution also shifts many customer service responsibilities from the staffing company to the payroll funding provider. Additionally, these bundled services come at a cost, and determining a fair and competitive price for these services is difficult when it is presented as a single fee.

As this staffing firm’s revenue increased, the owner began to see signs that it had also outgrown its payroll funding provider.

Some of the issues the firm encountered included:

  • Invoices being sent out late, for the wrong amount, or not sent out at all
  • Unprofessional communications by the payroll funding provider with the staffing company’s customers
  • Unexpectedly high fees with little explanation from the financier
  • Delays in the clearance of customer payments and the release of reserve accounts causing cash flow problems

The staffing firm knew that it was time to make a change and take more control of their business.  The owner notified its current payroll funding provider of their termination prior to their sixty day renewal, and engaged The Southern Bank in financing discussions.

Solution

In response, The Southern Bank worked with the staffing firm to scope out and implement a new payroll funding solution that better met their current needs.

By engaging with The Southern Bank, the staffing company benefited from:

  • A 42.4% reduction in financing costs due to a simplified rate structure
  • The transition of invoicing responsibilities back to the staffing firm, allowing them to better manage customer relationships and reduce confusion
  • A reduction in average day’s receivables outstanding from 32 days to 24 days
  • The elimination of lockbox fees and other administrative fees
  • Improved customer relations due to a higher degree of professionalism from bank representation
  • Greater financial clarity and control after “unbundling” bank office services

Conclusion

By financing with an FDIC member bank, the staffing firm was able to cut out the middle man and reduce payroll funding costs significantly. More importantly, The Southern Bank’s payroll funding offered the staffing client more control over their business resulting in improved customer relationships.