Last Updated on October 11, 2022
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, also known as invoice factoring, 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 agencies must pay their employees and when payment is remitted by their customers causes enormous strain on cash balances.
How Does Payroll Funding Work?
Staffing agencies receive payroll funding by selling their invoices to a third party payroll funding company (also known as the “factor”) in return for a cash advance (typically 80% – 90% of the invoice’s face value). When an invoice is submitted, the payroll funding company purchases the invoice, providing the staffing company with the cash needed to pay employees. The payroll funding company then collects from the staffing company’s customers when payment is remitted weeks later. Once the invoice has been paid, the payroll funding company will distribute the remaining value of the invoice to the staffing company, minus its factoring fees (typically between 1% – 3% of the invoice’s face value).
Read more about how payroll funding works.
Benefits of Payroll Funding Through altLINE
Unlike most traditional lenders, we’re committed to partnering with small and mid-sized staffing firms. altLINE has a working capital solution for staffing companies regardless of a business’s lifecycle.
By partnering with altLINE, staffing agencies benefit from:
- Improved cash flow to make payroll
- Direct bank funding, resulting in 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
- More than 85 years of experience working with customers
- Transparent rates
- Customized payroll funding programs to best meet your needs
- Flexible and quick funding options
- Payroll funding solutions when a line of credit is not an option
- Payroll financing for startups and small businesses
Whether you’ve been in business for two weeks or twenty years, altLINE is willing to structure a payroll funding solution that meets your needs.
Payroll Funding Case Study: Reducing Financing Costs by 42.4%
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.
Temporary Staffing Firm Specializing in Light Industrial with $5,000,000 in Annual Revenue
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 altLINE in financing discussions.
In response, altLINE worked with the staffing firm to scope out and implement a new payroll funding solution that better met their current needs.
By engaging with altLINE, 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
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, altLINE’s payroll funding offered the staffing client more control over their business resulting in improved customer relationships.
Frequently Asked Questions
Still have questions about how payroll funding for staffing companies works? Check out some of the common FAQs below:
How much does payroll funding cost?
Payroll funding rates can range from 1% – 7% of the invoice face value, depending on several criteria. In general, the faster a staffing company’s customers pay, the better rate it will receive. With altLINE, factoring fees are typically 1% – 3% of the invoice face value, if paid within 45 days.
Is payroll funding common for staffing companies?
Yes! Payroll funding is a common solution for staffing companies and temp agencies. Because invoice terms are typically 30 – 60 days but payroll is usually paid on a weekly or bi-weekly basis, payroll funding provides working capital to staffing companies to make payroll before receiving payment on their outstanding invoices. This additional working capital can help business operations run more smoothly and reduce the stress of running a small business, all while growing your staffing company.
Is a payroll financing service worth it?
Using a payroll funding provider is more beneficial for some staffing agencies than others. For example, staffing companies that need to make payroll before receiving payment on their outstanding invoices are well positioned to use a payroll financing service. However, if a staffing company has the working capital in place to make payroll and grow the business, payroll funding may not be the best option.
If you are unsure if payroll funding is the right solution for your business, fill out our quote form and speak with an altLINE representative. Our representatives will discuss your financing needs with you and make a recommendation on the best funding option for your business.
Grey was previously the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helped businesses find the information they needed to make informed decisions about invoice factoring and A/R financing.