Is Invoice Factoring Right for Your Staffing Agency?
By Trevor Sheffield
January 24, 2023
Every business runs into difficulties along the road to success. For staffing agencies, one of the most common roadblocks is managing cash flow. If this is something you’re having difficulty with, it’s likely you’ve been contacted by companies who offer help through invoice factoring. But before you make the big decision to jump into this potential solution, it’s vital that you understand what your options are and how they can affect your business.
Why staffing agencies struggle with cash flow
It’s not an uncommon experience for a staffing agency to struggle with cash flow. But why does this phenomenon occur so frequently? Simply put, the companies who use contractors found through a staffing agency often work on net-30, net-60, or net-90 day terms with their clients. However, the staffing agency is commonly the party responsible for paying their contractors. The delays transfer over to the agency, causing complications because federal regulations dictate that staffing agencies must pay their contractors no more than 30 days after an assignment is completed. Oftentimes, staffing agencies must pay their contractors when they themselves have not received a payment from the company they are contracted with. Without the cash to pay their employees outright, many staffing agencies fall victim to predatory loan practices in order to comply with federal regulations.
What is invoice factoring?
Let’s dive into what invoice factoring actually is. Say for example you have a contract with a business you work with that states they will pay you $5000 for services rendered. In the terms of the contract, it’s likely specified that the company has at least 30 days, if not more, before they must pay you what they owe. The issue? You have employees that need to be paid next week, but now you don’t have the cash to pay them.
When you use invoice factoring, here’s what happens: the factoring company steps in to take care of your employee payments. You sell them the invoices for the companies that owe you money. They will often charge a fee—for example, if the company you are contracted with owes you $5000, perhaps the factoring service will buy the invoice from you for $4500. They send you the cash you need to pay your employees on time. Then, since they own the invoices for the companies you contract with, those companies will pay what they owe directly to the factoring service instead.
Pros and cons to invoice factoring
When you’re low on cash flow, invoice factoring can seem intriguing. But as with any business decision, it comes with both positives and negatives. Let’s discuss.
The pros of invoice factoring include:
- Simpler than a loan. Getting a loan can take months even if you’re approved right away, and often require stellar personal credit and some sort of collateral. With invoice factoring, you don’t have to worry about those things. It’s easy to get approved and the process is quick.
- Speed. Invoice factoring is fast and doesn’t take much time to get set up. If you’re in a jam with finding the cash to pay your employees, then invoice factoring can step in to save the day.
- Keep you consistent. With invoice factoring, your consistency with the companies you contract with and the employees you hire stays reliable. No one is left out to dry, waiting for their paycheck to come in. This builds trust and in turn builds your business.
The cons of invoice factoring include:
- Expense. You lose money every time you work with an invoice factoring service. The amount of cash they offer to give you will never be as much as the invoice you’re owed—and those expenses can add up fast.
- Loss of control. You’re handing your invoices over to someone else, which puts you in a weaker position. Depending on another service for your cash flow isn’t always a good idea.
- Complications. If the company you’re contracted with can’t pay their invoice to the factoring service, then those invoices come straight back to you, requiring more cash than you’ll have on hand and putting you in a bind.
Diversify your cash flow
The solution to this issue? Work on diversifying your cash flow. If you have cash coming in from other sources, then you won’t be dependent on other services in order to pay your employees. Consider whether your agency can provide any of the following services in order to diversify your cash flow.
- Consultations. Many companies need help with knowing how to formulate a strategy for sales, social media, marketing, or other teams. Can you offer your expertise?
- Interview training, candidate preparation, resume reviews, and job post writing. You’re already working in human resources—try using your skills with individuals as well by offering help for those searching for employment. You can do mock interviews, help with sharpening resumes, or even write job descriptions that focus on the best aspects of a position.
- Hiring strategy coaching. You’re an expert at hiring the right people. Have companies pay you to teach them how.
- Offer individual projects in addition to regular services. Perhaps you’re writing weekly blog posts for a company. If they like the writing they’re receiving, try offering to have them pay you a one-time fee for that same employee to rewrite their website copy.
Which of these ideas will you try first?