Payroll funding for staffing agencies

Payroll funding helps staffing agencies by releasing cash from tied up invoices, this is done by selling your accounts receivable for an advance payment from a payroll funding company.

This process is also known as payroll factoring, it is a form of financing specifically designed to help staffing companies make payroll before they collect from their customers.

There are a number of reasons staffing agencies in the UK may utilise payroll funding services for their back office solutions. The primarily factor is it helps companies ease their cash flow concerns by receiving payment of invoices immediately.

Slow paying customers can put a strain on cash flow and factoring with payroll funding allows businesses an option to receive cash in 24 hours, as opposed to waiting 30, 90 or even 120 days to get paid by customers.

How does payroll funding for staffing agencies work?

Payroll funding for staffing agencies works by selling unpaid invoices to a lender, the following is how the process works:

1. You provide goods or services to your customers in the normal way.

2. You invoice your customers for those goods or services.

3. You “sell” the raised invoices to a payroll funding company. The lender will then pay the bulk of the invoiced amount immediately, typically up to 80-90% of the value, after verifying that the invoices are valid.

4. Your customers pay the payroll funding company directly. The provider chases invoice payment if necessary.

5. The lender will pay you the remaining invoice amount – minus their fee – once they’ve been paid in full

Can any staffing agency use payroll funding?

Any staffing agency can use payroll funding as it’s just as effective for established businesses, regardless even if you are a startup staffing agency. In assessing eligibility, payroll funding companies will look at several factors, including:

• The size and origin of the invoices you’re seeking payment for
• Time frames
• Potential risks
• Your own companies credit score and reputation

This last consideration is less important since the real risk for the factor lies with the credibility of the business owing the outstanding invoice. This is because lenders are more interested in the strength of your customers’ credit, rather than your own.

Payroll funding can be ideal for brand new businesses or even companies with poor credit, as a means of attaining finance more effectively. The rates may simply be slightly higher, as a result for less established businesses, or those with bad credit.

Advantages of staffing agency payroll funding

• Improved and more predictable cash flow – By using payroll funding, you can have the bulk of your invoices paid almost immediately rather than having to wait for the money to come in (potentially after extensive chasing on your behalf). It makes business planning and forecasting more accurate and allows you to take advantage of opportunities that might otherwise be unaffordable.

• Better chance of your business surviving – Better cash flow gives your business a better chance of survival. Many businesses fail due to poor cash flow, and payroll funding can keep yours healthy – as long as you use it wisely.

• Cheaper and easier than a bank loan – staffing agency payroll funding is usually cheaper than a bank loan and easier to obtain, making it good for short-term funding needs. It also takes the hassle of debt management out of your hands. Depending on the size of your customer base, that could be a big saving.

• Reduces your business overheads – payroll funding for staging agencies could reduce your business overheads. While there are fees associated with payroll funding, they may be less than the cost of paying dedicated credit control staff. Agency payroll funding may also improve the morale of people working in your accounts department, as chasing payments is often stressful work.

• Can be used as a temporary stop gap, should you win a large staffing contract and are unable to finance it until your client pays you.

Disadvantages of staffing agency payroll funding

• Unsuitable for businesses with few customers – Payroll funding isn’t suitable for staffing agencies with only a handful of main customers. Lenders prefer to spread their risk as widely as possible. They try to avoid a high concentration of invoices to just a few customers.

• Requires a big commitment – Although it’s sometimes possible to factor a small number of invoices (known as selective factoring or spot factoring), most lenders will want to take over the bulk of your accounts receivable. They may also try to tie you into a long contract, which could be two years or more. This is necessary from their perspective, but it means you can’t just dip in and out of payroll funding at any time. It’s a major business decision.

• Costs more if your customers are risky – Providers do their best to accurately determine the risk of late payment or non-payment of debt. This means they will assess your customers carefully. Their fees will reflect their perception of credit risk – if you or your customers are deemed high risk, fees will be high.

• Extra costs when it doesn’t work – There may be extra disbursements to pay if your clients turn out to be worse payers than expected. If a customer fails to pay, you may have to repay the amount the lender has already paid you, unless you pay extra for non-recourse factoring. In short, don’t expect a factoring company to take over your bad debts for nothing. They’re in business to make money, just like you.

• Can harm your relationships with customers – When you fund invoices and the credit control is handled by the payroll funding company, you are handing over some of the control over your customer relationships too. If the lender pursues the debt in a cold or aggressive manner, you risk your customers being put off working with you in future. They may also view the involvement of a lender as a sign your business isn’t doing well.