If you’ve worked in staffing for any amount of time, you know firsthand how difficult it can be to turn a profit. Not only are margins tight within the industry, but the very nature of staffing requires up-front operating capital to recruit, place, and pay workers until invoices are collected.
The fact is this: success in staffing is expensive. Firms that are experiencing growth quickly realize that with growth comes the pressure of needing additional operating capital to take on larger clients or break ground on expansion efforts.
For many staffing firms, one way to address these growth ceilings is by taking on a payroll funding partner. But what does a payroll funding partner actually do?
In this article we’ll take a high-level look at payroll funding; how it works, the difference between a funding partner and a bank, when a staffing firm should turn to funding, and an overview of key terms and questions.
What is Payroll Funding for Staffing Agencies?
The fundamentals of payroll funding are actually pretty simple: a funding partner purchases outstanding invoices, providing a cash advance on a staffing firm’s accounts receivable that is used to cover net payroll, taxes, and other expenses.
As a step-by-step process, payroll funding operates like this:
- A staffing agency places employees and completes a billing cycle
- The agency submits its invoices to the funding partner
- The funding partner advances an agreed-upon percentage of eligible invoice value (typically about 90%)
- The agency uses this newly available capital to cover payroll and other operating expenses
- The customer pays the invoice, and the remaining balance is reconciled according to the funding agreement
Let’s take a look at an example to see how it works in practice:
A staffing firm has $100,000 in approved, eligible invoices outstanding at Net-30 payment terms.
The funding partner provides $90,000 (90% of the total sum) up front. The other 10% is held in reserve (more on this later). This $90,000 is used by the staffing firm to cover payroll and any other expenses.
Once the invoice is paid in full by the customer, the funding partner releases the remaining $10,000 minus applicable fees.
Payroll Funding vs. a Traditional Bank Loan
Receiving loans from a bank and receiving payroll funding are not mutually exclusive. Bank loans can provide many things that payroll funding can’t, and vice versa.
The main difference between the two is that payroll funding is directly tied to a staffing agency’s accounts receivable, whereas a bank loan is more of a broad-based sum of money used for business financing. The benefit of payroll funding being tied to AR is it can grow with the staffing firm; as invoice amount increases, the terms of the funding partnership can adjust accordingly to accommodate demand.
Bank loans may also have longer term limits for repayment or scheduled repayment obligations, while payroll funding is repaid through invoice collection.
A bank loan will also be subject to a business’ creditworthiness and would be subject to established credit limits.
As always, these differences vary from bank to bank and funding provider to funding provider based on the nature of the agreement.
Payroll Funding vs. Invoice Factoring
Payroll funding and invoice factoring are fundamentally the same thing, and the terms are used more or less interchangeably.
The main difference, however, is that invoice factoring is more of a broad term that can apply to many industries, whereas payroll funding primarily refers to the specific application of funds to reconcile accounts receivable within the staffing industry.
When a Staffing Agency Should Consider Payroll Funding
Staffing agencies turn to payroll funding at various stages of their lifecycle. Many startups engage a funding partner early on to help cover the cost of getting up and running and make payroll for their first clients; staffing agencies later in their journey might bring on a funding partner as an infusion of cash to fuel sustainable growth efforts.
Here are just a few reasons why a staffing firm may bring on a payroll funding partner:
- A staffing firm is regularly turning down new business opportunities because they lack the immediate funds to pay an expanding workforce.
- The staffing firm is looking to expand into new territories or diversify into new verticals.
- A firm has the opportunity to bring on a larger local or national client but lacks the operating capital to cover a large influx of employees.
- Seasonal spikes in demand are putting stress on already tight cash reserves.
If you’re interested in learning more about payroll funding and what it can do for your staffing firm, reach out to the team at Lone Oak Payroll today.
Key Terminology Surrounding Payroll Funding for Staffing Agencies
There is a lot of industry-specific language when it comes to payroll funding. Let’s take a look at some important terms to know when talking about funding.
Advance Rate (Initial Reserves): This is the upfront amount given to the staffing firm from the funding provider, typically 90% of the invoice value.
Reserve: The remaining 10% of the invoice value that is released (minus fees) once the invoice is paid in full.
Tax Liabilities: The total employee and employer taxes in a given week.
Net Payroll: The total temporary employee and agency payroll that employees are being paid by the funding provider.
Garnishments: Any collections that the employee is responsible for that is taken out of their paycheck; child support, other wage garnishments, levies, etc.
Interest: A percentage charged on invoices that exceed a certain repay date, typically 30 days.
Chargebacks: Invoices that haven’t been settled by a specific date (typically 90 days from the invoice date). Once the invoice reaches this age, the funding provider recalls funds allocated minus any payments received on that invoice.
Payroll Costs: All liabilities for a given week (garnishments + taxes + net payroll + interest + fees).
Frequently Asked Questions About Payroll Funding for Staffing
How much does payroll funding cost for a staffing agency?
The cost of payroll funding varies from provider to provider, but some of the key factors in determining cost are:
- The volume of invoices being funded
- Customer payment terms
- Structure and term length of the agreement
Funding providers typically charge fees based on a percentage of the invoice value. Some agreements may also include additional processing fees or charges associated with invoices that remain unpaid beyond an established period.
Does a staffing agency need good credit to qualify for payroll funding?
Unlike traditional bank loans, payroll funding eligibility is traditionally based more heavily on the creditworthiness of a staffing agency’s customers than the agency itself. This due diligence is an additional benefit of bringing on a funding partner because, built into the structure of the partnership, is assessing the quality and creditworthiness of a staffing firm’s customers and their likelihood of paying their invoices. That said, a staffing agency’s financial history, existing obligations, and overall business health can still influence eligibility.
How quickly can a staffing agency receive payroll funding?
After a staffing agency has completed the initial approval and setup process with their payroll funding provider, funds can typically be made available within 24–48 hours of submitting eligible invoices. There can be some delays in this process including initial account setup, invoice verification requirements, etc.
Can payroll funding agreements grow with a staffing agency?
Absolutely! Because payroll funding is tied to eligible accounts receivable rather than a fixed loan amount, the amount of available funding can increase as a staffing agency grows and begins generating more eligible invoices. This fact is crucial because it makes payroll funding a vital resource for agencies experiencing rapid growth, seasonal demand spikes, or opportunities to take on larger clients.
What happens if a staffing agency’s customer doesn’t pay an invoice?
If a customer fails to pay an invoice, the outcome depends on the terms of the payroll funding agreement. In some circumstances, the staffing firm may be required to buy back the unpaid invoice or reimburse the funding provider after an established period of time. Some funding providers will charge additional fees on overdue invoices. Some funding partners have collections departments that will track down unpaid invoices and reconcile those issues through legal channels – another potential benefit of taking on a funding partner. There is a wide range of outcomes, and it’s important to understand the terms of your funding agreement fully before entering into a contract.
For more information on payroll funding, reach out to the experts at Lone Oak Payroll.