Financing For a Staffing Agency
- Staffing Agency Financing
- Advance on Invoices
- Low Rates
- Working Capital
- Cash Flow Issues
- Call Neal Now
Staffing Agency Financing 101
There has been a lot of focus lately on outsourcing employees. Many companies are taking advantage of using temporary employees to keep payroll and overhead costs down. This has had a huge effect on the Temporary Staffing industry. What once was considered a market dominated by a few national players has become a localized, highly niche business with unique funding needs. The dynamics of the marketplace have brought about a substantive paradigm change for temporary staffing agency owners and managers. Growth demands capital and cash flow, but the question is where to find the capital? There are a lot of resources that are ready to provide funds for an agency that has a wide range of benefits.
Define the Need
Knowing what should be financed and when to get financing is just as important as where to go for funding. Small businesses have a greater challenge in finding resources that support growth and expansion. Agency owners and managers should consider the circumstances that require financing to determine the best path that supports the business. All kinds of situations require additional capital infusions including:
- Expansion of company offices to accommodate anticipated/actual growth.
- Acceptance of large contract..
- Extended invoicing terms for clients.
- Bridge funding.
- Acquisition of capital assets like computer software or office equipment.
Whatever the need, it’s important to budget the capital appropriately and not be tempted to use it for another, unintended purpose. Going back for a second round of funding isn’t always successful and a shortfall in capital may cause the entire project to collapse.
Bloom and Grow
Due to the nature of business in a temporary staffing agency, the company’s ability to support its operations can also be a restriction on growth. The business requires large amounts of cash to pay employees while it waits to be paid by clients. Payroll, taxes, benefits, and other cash-consuming expenses must be paid and paid on time or else employees will go away and taxing agencies begin to show up looking for payments. Other costs including the employees of the staffing agency, utilities, vendors, and others charge late fees and high interest on unpaid balances, increasing overhead and depleting profits. The only way a temporary staffing agency can succeed and grow is with plenty of capital to meets its demands.
Positive and Negative Cash Flow
The capital needs of a temporary staffing agency are not like many other businesses. In the temporary staffing business, cash flow is critical. There are two types of cash flow models in business – positive and negative cash flows. Positive cash flow occurs when capital is received before capital is disbursed. An example of this type of positive cash flow would be a contractor receiving a down payment for a construction project. Before the project starts, the contractor has money to work with and which can be spent on expenses like payroll and materials. That makes managing cash flow much easier and facilitates business operations.
Negative Cash Flow Requires Focused Management
The opposite of positive cash flow is negative cash flow. In this situation, cash is disbursed before it is received from the client. Spending valuable cash before it is replaced creates a management nightmare. It’s a lot like rolling the dice on a Las Vegas craps table – sometimes you’re a winner and sometimes you’re a loser. For many small businesses, negative cash flow can not only cripple operations, but it can also cause a complete collapse. Managing cash flow means having resources on hand to solve any shortfalls in cash that may cause damage to the business or its employees.
Let’s say your niche temporary staffing agency has some money in savings. That’s great and good for rainy days. Growth is not a normal activity for most companies. Growing a company occurs over time but there are points in the growth cycle that demand capitalization beyond normal operations. Even if the company has sufficient savings reserves, is it smart to risk company assets on a growth move? Remember, not all efforts in business are successful and if the new venture doesn’t work out, the company could be without reserves it needs to function daily. That puts the entire enterprise at risk and that’s not smart business.
Get a Loan?
Obtaining capital from an outside resource makes sense in many situations. There are traditional resources for capital that are ready to fund a company’s growth like banks and finance companies. There are advantages as well as issues when borrowing capital from a bank or finance company that should be examined:
- Local resource – one-on-one contact to deal with.
- Growing businesses grow banks – banks earn profit and grow from financing local companies.
- Community economic support – banks employ local residents and purchase goods/services from local companies.
- Collateral requirements – up to 300% of the amount borrowed.
- Repayment Terms – could be fixed monthly payments that conflict with cash flow.
- Operating Flexibility – banks require monthly reports on business profitability, debt reductions, and other issues.
Small Business Development Centers
Federal, state, and local governments sponsor different forms of Small Business Development Centers (SBDC). These offices provide companies with resources that can help acquire funding for growth and/or expansion. In many cases, the SBDC’s help with obtaining Small Business Administration (SBA) loans and guarantees for companies with short or poor credit histories. SBA loan guarantees are attractive to banks and finance companies as they ensure that up to 80% of the amount funded will be repaid in the event of a default on the loan.
- Administrative support for application process.
- Additional support services for small business owners/managers.
- Access to Federal, State, and local grant opportunities.
- Extended application and qualification process.
- Collateral includes personal assets (home, vehicles, etc.) and personal guarantee.
- Defaulted amounts may be deducted from future tax returns.
Investors Can Help With Financing
Another choice for financing is bringing investors on board. Privately held companies can offer shares of stock or equity in the business in exchange for funding. Federal and state laws regulate the sale and transfer of stock shares or equity ownership in business. Successful temporary staffing agencies expanding into new geographic territories often seek investors who can also help with local marketing, real estate locations, and other important considerations. Funding by investors has positive and negative aspects to consider, such as:
- Greater repayment flexibility than traditional financing.
- Opportunity to convert equity into debt to regain full ownership in the future.
- Friends and family often desire to invest in the opportunity due to familiarity with the company.
- Documentation can be highly detailed and complex requiring legal counsel.
- Funds may not be provided all at once, the company may have to reach milestones for next stage funding.
- Limitation on funds available to meet growth needs in the future.
Putting Assets to Work
Every business has assets. Machinery, equipment, tables, chairs, computers, and many other items are assets. In the temporary staffing business, one of the biggest assets the company owns is its accounts receivable. Accounts Receivable is money waiting to be received from clients. In many situations, accounts receivable can become quite a large number. Unfortunately, for many temporary staffing agencies, clients don’t always pay on time. Invoice terms of 30 days often turn into 60 days or more. Fortunately, there are finance companies, called Factors, that will fund a business’ accounts receivable up to 90% of the face value of each outstanding invoice. This is especially helpful for new staffing agencies as the funding decision is based upon the client’s credit rating, not the temporary agency’s rating. That’s called putting an asset to work!
Other Ways to Finance the Business
A few other options are available to agency owners and managers that are lesser-known funding resources. When bank loans or other more traditional avenues are not available, there are more options. A few of those include:
- Internet funding – the use of social media platforms that solicit funds using crowdfunding protocols.
- Credit cards – qualification and funding happens rapidly for up to $20k to $30k.
- Hard money – private lenders that provide capital with extremely high interest and collateral requirements.
The above funding resources should be approached with caution and an understanding of the conditions required before funding is allocated. Depending upon the urgency for capital, some alternatives can be utilized more readily than others. In any case, it is advisable to review all documents, caveats, stipulations, and conditions with great care.
Successful Financing Requires Planning
Good financial management includes planning for the future. There are times when unexpected expenses suddenly pop up out of nowhere and require capital to resolve. Likewise, there are times when an expected expense arrives but the cash required to deal with it isn’t in the checking account. In either case, as much planning as possible will help provide guidance toward finding the best funding method and resource. Nobody wants to be caught without options and the only way to secure options is to do it in advance. Temporary staffing agency financing isn’t impossible but it does require diligence and attention to details. A quality funding partner can make all the difference between growing successfully or going out of business.