Temporary Staffing companies play a key role in employment, and have helped reduce the overall unemployment numbers in the US over the past 6 months, even if their workers are employed on a short-term basis. However, temp staffing is one of the many small business sectors that have been affected by primary lenders who have been forced to tighten credit policies.
According to a February 2011 CNN Money article, banks slashed small business lending by $43 billion, or 6.2%, from June 2009 – June 2010. The SBA says there has been a drop of $59 Billion in small business lending since June 2008. For large businesses, the numbers are even worse, as commercial loans for those companies decreased by $156 billion from 2009 – 2010.
Temporary staffing is a very cash intensive business, and lack of sufficient cash flow can threaten the survival of this type of company very quickly.
Temp staffing companies provide outsourced labor for their clients, typically on a short-term basis, which can be for one day, one week, or for up to 6 months at a time. These employees are hired by the staffing company, and are on the staffing company payroll, rather than on their client’s payroll. The staffing company is on the hook for weekly or bi-weekly payroll, taxes, benefits, and other expenses, yet their client invoices can remain outstanding for 30 – 45 or more days, which can create a cash flow crunch for staffing owners.
With banks tightening their credit policies, how do temp staffing agencies ensure sufficient positive cash flow for their business?
An easy solution for bridging the gap from the time employee payroll is due, to the time when client invoices are paid, is to…
Factor the Client’s Accounts Receivables!
Essentially, secondary lenders, including factors and asset-based lenders, can convert future invoice payments immediately into cash, at a small discounted rate, so that a staffing owner has the ability to pay for working capital costs, including payroll, payroll taxes, and other expenses. No longer will they have to limit the growth of their company by using personal funds, credit cards, or rely on personal or business bank lines of credit.
Secondary lenders (factoring companies) will assess the creditworthiness of the clients of the staffing company, the average turnaround time on receivables, and the volume of invoices funded to determine funding rates. Receivables factoring does not create a liability for the staffing company on their balance sheet, rather it turns a current asset (accounts receivable) into a more liquid current asset, which is cash.
Finding and partnering with a lender that understands your business, and one that keeps open lines of communication in the relationship, can mean the difference between success and failure in your business. Lenders that understand temporary staffing are typically members of the American Staffing Association (ASA), the national voice for the industry, or one or more active state staffing associations. Or, they may belong to one or more specialty niche organizations, including TechServe Alliance (for the IT consulting industry), The Executive Healthcare Forum, or Staffing Industry Analysts. Many lenders have owned or run temp staffing companies in the past, and can provide a unique perspective on the relationship.
About the Author: Dale Busbee is Vice President of Business Development with Prosperity Funding, Inc., a leading direct lender/factor providing accounts receivable finance and back office business administration services exclusively for temporary and contract staffing organizations in the U.S. He may be reached at (985) 641-8817 or via email at dale@prosperityfunding.com.
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