Most staffing companies use some form of factoring or payroll funding to finance their payroll and meet their cashflow needs. A staffing business is an ideal candidate for invoice factoring because it experiences a cashflow mismatch between the time it has to meet payroll for employees and the time it gets paid by its customers. The staffing firm usually has invoice terms of Net 30 with its clients and that usually means that payment is anywhere from 30 to 60+ days away. In the meantime, employees are paid on a weekly or bi-weekly basis creating a need for cash before the invoices to the client will get paid. An even more pressing concern is that payroll taxes also need to be paid on a regular basis.

    Another reason the staffing business is well suited for accounts receivable financing is that it has very healthy profit margins. The markup on an employee is generally 40% to 60% more than the employee's wage and benefits cost. This means that if Joe Temp is making $10 per hour, the staffing company is billing its client $14 to 16$per hour for Joe's services. This profit margin usually covers the payroll expense, payroll tax expense and other overhead such as workers compensation insurance. The healthy markup allows for the cost of the payroll financing to be covered and still have a worthwhile profit left over for the staffing company.

    A payroll funding company who funds based on accounts receivable will generally advance 80-100% of the invoice amount to the staffing company. The industry has developed many funding models to accommodate all types, sizes and preferences of staffing companies. There are also additional services they will include with their funding. Generally, the advance rate and the pricing depend on the funding model and the extra services included. There are three main models of payroll funding using accounts receivable which are customized to fit a particular client's needs. The three main models are "Money Only", "Pay / Bill" and "Full Service". All models include credit work to credit approve the client you will be servicing and most models include collections work on the accounts unless you prefer to keep that function in house. 

    The type that is a best fit for your staffing company will depend on your needs and preferences. You should read more on each service model to familiarize yourself with their basic characteristics and then work with your funding company to determine which model or combination of models works best for your business. If you have further questions or would like a more in depth explanation of anything mentioned in this section or other sections please feel free to contact us and we will be happy to help you determine how payroll funding can help you start or grow you staffing business today.

Money Only: Invoices + Signed Time Cards = Cash

    Money only means pretty much what it says. It is the most basic traditional model of buying invoices and advancing a percentage of the invoice face value to the staffing company. A factoring company that provides you with this service will require you to submit to them a copy of your invoices and employee time cards signed by a representative at your customer. They will immediately turn this paper into cash for you by advancing 80-90% of the total invoice amount by wiring the cash to your bank account. You are responsible for sending the invoice to your client, paying the employees, paying the federal state and local payroll taxes and all the other aspects of running your business. This level of service works well for many different types of staffing companies ranging from those in the start up phase to those who are large independent staffing firms with multiple locations. Please see the example below to better understand this product.

Money Only Example:

Joe Temp is paid $10 per hour but is billed out at $15 per hour and works 35 hours a week. The math is as follows: 

Invoice to client Joe worked for:     $525 = $15 x 35 hours worked

80% Advance from factor:               $420 = $525 x 80%

Payroll $needed to pay Joe:            $350 = $10 x 35 hours worked

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Amount available for operating

and payroll expenses:           $70 = $420 - $350

    Now you must remember when the invoice gets paid  in 30 - 60 plus days there is still $105 to account for. The factor would take their fee which is usually a percentage based on the time it takes the invoice to get paid. In this example let’s say the factor earns a fee of 4% for up to 60 days. In this case the factoring fee would be $21. The remaining $84 goes back to the staffing company.

Things to consider when deciding on a service level model include:

· How is your time best and most profitably spent?

· What level of outsourcing are you comfortable with?

· What types of system and procedures do you already have in place?

· What is the cost of doing different functions in house versus outsourcing?

· Cost considerations of different levels of service. (The interesting thing is that some factoring companies can offer lower costs for higher levels of service because they have less risk and benefit from achieving economies of scale over their entire portfolio.)

Pay / Bill

    The pay bill level of payroll funding factoring service is a middle of the road product between money only and full service payroll factoring. At this level of service you are responsible for submitting employee time cards to the funding company. They will then use those time cards to generate and mail invoices to your customers. They will also process the payroll, cut and deliver you employee paychecks and remit tax remittances to federal state and local tax entities on your behalf. The advance rate is usually enough to cover payroll and related taxes each week.

    Pay / Bill has two main benefits to the staffing company. The first is that the payroll funding company manages the back office functions of invoicing, payroll and tax remittance which saves you the time headache and expense associated with each of these functions. The second advantage is that the time you save allows you to focus on the most important aspects of growing your business namely sales and recruiting.

Full Service

    Full service payroll funding programs include all aspects of money only and pay bill. In addition it includes an integrated software package that helps you manage both front and back office aspects of your staffing company. The front office piece manages resumes, scheduling, customer relationships and candidate skills tracking. The back office piece handled by the factoring company includes billing, collections, payroll processing and creation of employee paychecks or direct deposits, tax remittance, general ledger accounting and the creation of standard and customized management reports. This level of service also includes credit and collection services. Full service payroll funding is perfect for the busy staffing owner or manager that wants to keep their overhead low and focus on growing their business by providing excellent, organized, dependable service to their clients. It is important to keep in mind that under this type of funding program you will rely heavily on the factoring company for your day to day operations and many aspects of your service to clients and employees. When choosing this level of service you should be very comfortable with the funding company, the software they provide, the training and support that is offered and who will be handling the day to day functions on your account. There are many cost savings and economies of scale that you can achieve by using a factoring company’s full service product but you must make sure you choose a firm with a good reputation that you are comfortable working with. Your business depends on it.

If you own or are starting a staffing company we can help you evaluate your options and direct you to the factoring company that will best fit your needs.