April 2018

The New Industrial Revolution: Lending Opportunities Spurred by Growth of the Gig Economy

The war for talent is over. And the employee has won. Employees today demand the same level of choice, service and flexibility in the workplace as they do as consumers. As a result, we’re seeing a dramatic change in the shape of the global workforce. The rise of the gig economy is transforming work as […]



Gerard M. Hanabergh, Managing Director, Underwriting, White Oak Commercial Finance

Gerard M. Hanabergh, Managing Director,
Underwriting, White Oak
Commercial Finance

The war for talent is over. And the employee has won. Employees today demand the same level of choice, service and flexibility in the workplace as they do as consumers. As a result, we’re seeing a dramatic change in the shape of the global workforce.

The rise of the gig economy is transforming work as we know it. For workers, the gig economy offers control over their schedules, geographic mobility and opportunities to try out for long-term employment. For employers, the flexibility and opportunities created by the on-demand nature of the gig economy help them explore new markets and ride seasonal fluctuations while reducing labor costs and tax obligations.

The gig economy also creates significant opportunities for businesses that support workers and employers — the staffing sector, which helps identify talented employees, and the financial sector, which helps meet payroll. But before we dive into that, let’s take a look at how the gig economy is changing the way we think about work.

Emergence of the Gig Economy

Contingent work — nonstandard work arrangements, including temporary or contract work — is not new. Kelly Services and Manpower have provided temporary clerical and industrial workers since World War II ended. What’s new is the landscape, which technology has radically changed.

The gig economy — an environment in which temporary positions are common — emerged in the wake of the Great Recession, when high unemployment made temporary workers easy to find. Although employment conditions have changed considerably since then, the gig economy shows no signs of going away.

Gigs have soared into mainstream business consciousness, in part, because of the internet and the ability to work remotely. More recently, apps similar to ride sharing services Uber and Lyft or less well-known home help services like TaskRabbit and Handy have shifted some of the power to independent contractors who manage their own short-term arrangements.

Still, the vast majority of workers find opportunities in the more traditional staffing industry, which is becoming a fundamental part of the U.S. economy.

Current State of the Staffing Industry

The numbers are difficult to pin down. But a few facts from a recent contingent workforce study by Ernst and Young (EY) indicated significant growth in the world of contingent workers — or giggers — also known as freelancers, independent professionals, temporary contract workers, independent contractors or consultants. EY’s findings include:

  • One in two organizations reported a significant increase in the use of gig workers over the last five years
  • More than 34% of organizations engage contingent workers for 12 months or longer
  • 20% of organizations had a workforce comprised of 30% or more contingent workers

The growth in contingent workers is far outpacing general employment growth. Recent research from Harvard economists Lawrence Katz and Alan Krueger showed the number of workers engaged in alternative work arrangements rose by 66% between 2005 and 2015. This compares with just 6% growth in overall U.S. employment over the same time period. The economists’ work indicates the conventional full-time job may be disappearing.

Industries Supplied by the Staffing Industry

The U.S. is home to about 20,000 staffing and recruiting companies. According to the American Staffing Association, which keeps track of the industry, more than 3 million temporary and contract employees work for those companies during an average week. Over a year, they hire nearly 15 million temporary and contract employees.
Jobs performed by temporary and contract staff span virtually all industries and embrace a broad array of duties, from industrial laborer to CEO. Wages average $17 an hour, while some contingent workers make more than $100 an hour.

American Staffing Association data divides the percentage of staffing employees by sector as follows:

  • Industrial: 37%
  • Office (Clerical and Administration): 28%
  • Professional (Managerial): 13%
  • Technical, IT, Scientific: 13%

Within organizations, the largest users of contingent workers are operations, production and services divisions (37%) and IT departments (32%), according to EY.
Optimism runs high in the staffing industry. Seventy-five percent of respondents in a Bullhorn survey of 1,400 staffing professionals anticipate an increase in revenue this year, including 20% who predict an increase of more than 25%.

Where Financial Services Fit In

As the staffing sector continues to grow, so will the companies supporting it. As staffing firms adjust to the changes of the gig economy, they will require the skills of the financial sector to manage the unique nature of the business.

In the staffing industry, the employee is the product. Typically, contingent workers are not employees of the firms that profit from their services. Instead, they are independent contractors or employees of staffing agencies that act as the worker’s employer of record for tax purposes.

Meeting payroll can be a challenge for the staffing industry. These companies send workers into the field and typically pay their payroll wages, taxes and insurance weekly. But the employer — the staffing firm’s customer — usually has 40 or more days to pay for the employee’s work.

The math doesn’t add up. Covering weekly payroll creates a financial gap for staffing firms that begs for access to capital. At White Oak Commercial Finance, we have been providing working capital financing products to staffing companies for decades. As a result of the tremendous demand in the market and the unique requirements of the staffing sector, we have begun formalizing those staffing services.

The two biggest concerns we hear from the staffing industry are finding the right people for the jobs and collecting on the staffing contracts. These issues are closely tied. Finding and delivering the right people with the right skills at the right time is key, but they must be paid on time if you want to deliver them again next week.

Financing the Gig Economy

Since staffing firms require a finance partner that recognizes the unique challenges facing their industry, many have turned to alternative lenders for the speed and flexibility that is hard to replicate in a regulated traditional banking market. These lenders also must be service-oriented and understand the nuances of the industry.

For these reasons, many staffing companies are now financed outside of regulated banks — a trend I expect to continue. As the staffing industry becomes core to our on-demand economy, cash flow shouldn’t be an impediment.

Yet cash-flow lending terms and conditions can be harsh for small- to medium-sized businesses. Alternative lenders are better able to develop personal relationships and react to the staffing firms’ specific needs, sometimes coming up with hybrid approaches that make sense for an individual situation.

Cash flow is more than cash. Supporting the staffing industry may also involve back-office services, including payroll processing, billing, credit and collections, online reporting, payroll tax processing and W2 processing.

Lenders with a solid foundation in factoring and asset-based lending products are a good fit for this industry. Their experience enables them to better monitor accounts and quickly and easily switch to a bulk or ledger structure as needed.

Joining the New Industrial Revolution

Staffing firms need creative and flexible financial partners to help them grow with the gig economy and react to unforeseen changes.

The gig economy is not a passing fad. The increased use of a con-tingent workforce represents opportunities across the board — for employees, the staffing sector and the financial industry. The traditional workforce has already been disrupted. We now face opportunities to disrupt and reshape the way we finance and support what emerges.

As organizations cut costs and improve their agility, they are able to meet constantly changing demands of existing consumers and explore new markets. Contingent workers, who crave control and flexibility, are able to share their talents more widely. By supporting the staffing industry, lenders are contributing to the opportunities and economic prosperity derived from a new, flexible workforce.