One of the biggest challenges for an operator of a temporary staffing company is maintaining an adequate amount of working capital. At the risk of oversimplifying the situation, cash goes out quicker that it comes in. Invoice factoring is a great solution for temporary staffing companies with cash flow issues.
The problem is not profitability. A company can show excellent earnings, yet have a hard time making payroll and other operating expenses. With the temporary staffing industry, this pattern is all too common. The main reason is their credit customers typically pay anywhere from 30 to 60 days after they've been invoiced, but disbursements, especially for labor, occur much sooner. With accounts receivable factoring, the imbalance between outflows and inflows is eliminated, which allows the business to pay bills in a timely manner and grow.
The mechanics of invoice factoring
When a company factors invoices, they receive an advance, typically between 70% to 85% of the amount billed another company. The factoring company will often contact the customer to verify that the services have been performed satisfactorily and the invoice will be paid without any offsets or discounts. The verification process is very important because factors utilize bank credit lines to advance funds to their clients. They MUST know that the invoice (s) they're sponsoring funds on are valid, due, and payable. At the sunset of the factoring relationship, letters are sent to the client's customers which instructions them to send payments to a lock box controlled by the factor. Once payment is received, the reserve (total invoice amount less the advance made) less the factoring fee, is wired to the customer's account.
How to set up a factoring account
Getting access to working capital via accounts receivable factoring is relatively simple. The client first fills out an application, which requires the submission of basic information about the company and its owners. Although financial statements are part of the application, the company's financial standing or credit rating is not a major variable in being qualified. The credit standing of the client's customers is of utmost importance in the decision, as their track record of paying invoices in full and on time motivates the factoring company to advance funds to the client. That's why a master list of the customers is required, along with a current accounts receivable aging schedule and articles of incorporation (or LLC documentation). The application is processed quickly and a letter of intent is issued to the client which outlines the advance rate and fee structure. Fees generally range from 2.5% to 5%, depending on the industry and credit standing of the customers.
Benefits temporary staffing companies can derive from invoice factoring
Although invoice factoring is a widely-used financial tool, many business owners do not know that they can unlock the power of their accounts receivable. There are many benefits of factoring:
- Factoring is not a loan. It is an off-balance sheet transaction
- Funding is limited only by the pool of a company's receivables
- Most factoring companies offer professional collections
- Funds can be available as soon as three days from the time application is received
- No personal guarantees
- Free credit screening
Invoice factoring is not for every company, but it is certainly tailor-made for the temporary staffing industry. Cash flow is important for all firms, but it is literally the life-blood of staffing companies. Without adequate working capital, it is nearly impossible to grow and thrive.