Last Updated on August 26, 2021
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 altLINE, 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.
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.
Grey is the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helps businesses find the information they need to make informed decisions about invoice factoring and A/R financing.