Lone Oak Payroll vice president of credit, Kevin Standa, provides insight into common financing solutions that staffing agencies can explore to improve cash flow.
Staffing agencies have many options to choose from when it comes to financing solutions and vendors. After more than nine years in the factoring industry, I have helped hundreds of clients across many industries figure out the financing solution that best fits their business model and operational processes.
For the staffing industry, there are two primary financing solutions that align with the staffing agency business model: invoice factoring and payroll funding. Based on my experience, here are the differences between these financing options and the potential impacts to your business and cash flow.
Invoice Factoring
Invoice factoring is a process in which a company sells its accounts receivable (A/R) to a third party in exchange for immediate cash flow to cover business expenses, pay for employees or equipment, or otherwise grow the business. If you have a $1,000 invoice and an advance rate of 90%, you would receive $900 on day 1, rather than waiting 30, 60 or even 90 days to get paid for that invoice.
Pros
With pure invoice factoring you receive immediate cash flow for your business without all the hoops that traditional banks make you jump through. The work gets completed, the invoice is generated, and you get the cash you need. In addition, since factoring is more flexible than banking, you can take on additional projects without the threat of growth being stifled by a lack of cash flow.
Cons
Factoring is more expensive than traditional banking. With the increased risk and lack of regulation, there are additional costs associated with factoring. Often, traditional factoring companies do not provide the necessary support to help your company grow and prosper the way it could with the right back office support structure.
Payroll Funding
Similar to invoice factoring, payroll funding is also the process of selling A/R to a third party for cash flow. In contrast, payroll funding offers additional services that traditional factoring companies cannot offer. Not only does your company receive instant cash flow, but administrative burdens like payroll processing, direct deposits, checks, garnishments, taxes, benefits and other payroll services are taken care of for your staffing agency.
Pros
Payroll funding costs the same amount and offers all the same benefits as traditional factoring. In addition, payroll funding handles almost all the administrative tasks that your company faces. This allows the company to be more productive with fewer employees. It also removes the potential for costly mistakes to the company. Finally, it provides peace of mind that your employees will be taken care of if you don’t have time to handle payroll.
Cons
Payroll funding is still more expensive than bank financing; however, payroll funding offers additional services that banks do not. If your company prefers to manage all payroll tasks and issues internally, it will be more cumbersome to fund the A/R through a payroll processor than a traditional factor. This is because payroll funding processes and manages payroll prior to determining funding amounts.
Conclusion
It’s important to understand your options when it comes to financing solutions for staffing agencies. If you’re looking for more information on which solution is the best fit for your staffing agency, please contact Lone Oak Payroll to learn more about what might work for your business model. With years of experience in the factoring industry as well as many staffing verticals, our team has the knowledge to help you make smart business decisions and achieve your growth goals.
About Kevin Standa
Kevin joined the Lone Oak Payroll team in 2018, bringing more than 9 years of factoring experience with him. With a strong background in credit and risk management and as a licensed attorney, Kevin has helped to reduce risk and increase efficiency by creating new processes and procedures for Lone Oak Payroll. Kevin holds a B.A. from the University of Minnesota, Twin Cities and a J.D. from William Mitchell College of Law. Kevin and his wife welcomed their first child in 2018. In his free time, he enjoys playing golf and hockey.
