Last Updated on January 27, 2020 by Grey Idol
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.
How it works
When an invoice is 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.
Read more about how payroll funding works.
The Southern Bank’s Payroll Funding Solution, altLINE
Unlike most traditional lenders, we’re 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.
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 The Southern Bank in financing discussions.
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
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.
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.