April 2012

Unobstructed View – When it Comes to the Economy, Lenders to the Staffing Industry Have a Front Row Seat

When economic changes are afoot, lenders serving the staffing industry have the advantage of a front row seat. Therefore, we asked three industry experts for their perspective on their dynamic industry: Stephen Leavenworth at Sterling Bank’s Payroll Finance division, James Rothman of Crestmark Bank and G. Allen Geyer of ARG Financial. The three speak to topics ranging from the mechanics to lending to the staffing industry to the indications they perceive for key sectors they serve.

When the economy sags, temporary employees are usually the first to go. When things improve, they’re the first to get hired, thus enabling businesses to do their work without committing to the overhead associated with full-time, permanent employees. Trends within the temporary staffing industry are important predictors of the direction in which the overall economy is headed next. When changes are brewing, lenders serving the staffing industry have the advantage of a front row seat.

We asked three industry experts for their perspective on this dynamic industry: Stephen Leavenworth, division president of Payroll Finance, a division of Sterling National Bank; James S. Rothman, group president for the East region at Crestmark Bank; and G. Allen Geyer, president of AGR Financial, LLC.

With 25 years of financing experience, Leavenworth is well-versed in factoring and asset-based lending for the staffing industry. Sterling has been funding staffing companies for 30 years and serves the light industrial, IT and clerical/administrative sectors. The company provides full-service funding and banking, asset-based lending, cash management and equipment finance as well as a full-service back office for its staffing funding clients.

Rothman has been in the asset-based lending, banking and finance industry for 28 years. His interest in temporary staffing was heightened in 1994 when he was hired as a consultant to evaluate TempFunds America, a company that provided back-office support and financing to staffing companies. He saw an opportunity to expand the financing side of the business to include factoring and asset-based lending, and then joined in, eventually becoming president and part owner. The company grew into one of the largest specialty lenders to the staffing industry. After selling the business, Rothman came to Crestmark Bank, which offers multiple product lines, including asset-based lending, recourse and traditional factoring. It delivers back-office services such as payroll and billing, software and workers compensation insurance through partner relationships in addition to premium finance, merchant factoring and truck leasing.

Geyer held a series of high level positions at large banks before starting AGR Financial 17 years ago. “At the time, a close friend started a temporary staffing agency, so I looked into the industry,” remembers Geyer. “I really liked the space and decided to focus on it exclusively. Owners of staffing companies tend to be diverse, interesting, hardworking and entrepreneurial.” AGR Financial finances the full gamut of the staffing industry, from day laborers, light industrial, clerical and healthcare to consultants, healthcare, IT and specialty personnel, including locum tenens physicians, accountants and engineers. The company provides asset-based lending, factoring and back-office processing as well as handling mergers and acquisitions.

Navigating Potential Pitfalls

“If you finance a specialty business, your focus has to be there 100%,” says Leavenworth. “If you are in transportation financing, the joke is that you have to be able to smell diesel fuel on the invoices or you don’t finance the invoice. You have to know the trends in the business, check every box on your closing checklists and be very detailed and methodical in your day-to-day approach; otherwise you are just asking for problems.”

Geyer defines temporary staffing as any situation in which an entity puts people into the field and pays them faster than the staffing company gets paid, causing a funding mismatch for which the lender provides financing. “Typically they have to pay their payroll wages and taxes weekly, which accounts for 70% or more of their cost of sales,” adds Rothman. “In an industry where the average time to collect receivables is about 42 days, covering a weekly payroll exposes a financial gap that begs for liquidity and access to capital. The faster the staffing company grows, the bigger that gap gets.”

Government contracting is one of the segments that Sterling specializes in. “A great many lenders do not like financing prospects that do business with the government because of the invoicing requirements, security levels, thicket of government forms and the way they have to receive payment,” explains Leavenworth. “We help our clients monitor their staffing costs or time in accordance to the specifics of the government contracts, so that they don’t make costly mistakes.”

One of the biggest points of tension between a factor and the client is debtor (customer) credit approval. “Staffing companies are revenue-driven, and they tend to be entrepreneurial, so they want to generate sales,” remarks Rothman. “They may take greater risks in terms of the credit they are willing to offer customers. Lenders want to exercise more caution by evaluating the creditworthiness of the trade receivables and establishing credit limits that reasonably match the customer’s financial performance and historical payment cycle. Lenders have to manage this dynamic to understand what their needs are in terms of customer concentrations and threshold for risk tolerance.”

An industry full of unique challenges and changing dynamics can be fascinating, but it requires care and expertise on the part of the lender. “You have to keep an eye on fraud and what you can do to mitigate it,” warns Geyer. “You have to watch closely to be sure payroll taxes are paid. If a company needs money, avoiding the taxes is the easiest way to get it, but that solution has severe consequences — for the staffing company and the lender.”

Technology is critically important. “We now have the capability to collect time and data via biometric scanners and Web-time or phone dial-in capture, but some companies still use timecards and signatures,” says Leavenworth. “Those firms need to update their technology, or they will be left behind.”

“The issue of workers compensation can be a game changer, too,” notes Leavenworth. “The first two questions I ask a prospect are whether their taxes are up to date and if they know what they are facing in workers comp insurance. In California last year, workers comp insurance rates increased 30%. They were increased another 37% for 2012, and that’s before the adjustments for actual insurance claims and loss experience. If a company has a year with high claims, it could see a 70% increase in its insurance costs. That severely cuts into the profit margins, and staffing companies can’t pass on the costs to their clients if they want to stay competitive and keep business.”

Lessons Learned During the Recession

During the recession, many staffing firms didn’t cut expenses and overhead as quickly as they should have,” recalls Geyer. “It takes time to build a solid infrastructure, and companies were reluctant to lay off good people, but the only way to pay them was out of equity. Now there is less equity in the industry, which means there is less room for error. If a company makes a mistake, it has fewer resources to carry it through, and that translates to more risk for everyone, including the lenders.”

“There were plenty of failures amongst staffing companies, especially smaller ones,” asserts Rothman, “but the failures weren’t a problem to most lenders, because they were lending against the receivables. As long as they monitored payment of receivables and taxes, they were okay. Many staffing companies moved to a model of less brick-and-mortar offices, more centralization and internet recruiting so they can be more nimble when sales decrease in a slower market.”

“The recession separated the strong management teams from the average ones within the staffing industry, and we chose to build our asset base by partnering with the strong teams,” says Leavenworth. “Since all the staffing firms were suffering from the same macro issues as other businesses, we decided to drill deep into the causes of those losses and the amount of time it took management to react. We identified the firms and teams that were able to restore profitability in a short timeframe and saw an opportunity to attract new, loyal clients.”

“Though the staffing industry is a leading indicator of overall economic health, in this recession it didn’t change right away,” reports Geyer. “About four months later, it hit and went on a very steep slide, by about 40%. I knew it would go down, but the lag was a surprise. The well-managed staffing firms that survived the recession are now a little better off than they were before the recession. During the time when the banks stopped lending and some staffing companies stopped borrowing, staffing lenders were able to step in and fill the vacuum. Companies still needed working capital and looked for lenders that specialized in their industry. AGR Financial benefited by that and brought on lots of new business.”

Reading the Signs on Wall Street

“Our full-service portfolio is large and diverse, and it mirrors the indicators used by The Wall Street Journal and other media outlets,” says Leavenworth. “On a month-to-month basis, we have a good feel for expansion and contraction on the overall jobs picture. IT is growing faster than other segments. It is not unusual to have a technology installation that requires a dedicated workforce for a specified period of time. At the end of the project, the workforce leaves that project and moves onto another. This is a new employment model, and it is the IT staffing companies that are leading the way.”

“Light industrial has come back and is expected to grow, though not as strongly as last year,” states Geyer. “Clerical will probably grow more slowly than other segments. Hospitals use temporary staffing to keep their workforce flexible, but there will be weaker growth there. Healthcare IT didn’t suffer much during the recession because of long-term projects. This segment must be watched closely, since there will be run-off as these projects reach completion. Specialty industries — such as locum tenens, engineers, accounting and finance — will continue to grow.”

“If unemployment is low, it can be hard for a staffing company to recruit, reminds Rothman. “If unemployment is high, there is a better workforce to recruit from, but it can also indicate that there are fewer jobs to fill. Over the last few years, we watched the staffing, transportation and retail sectors go up and down, but now all three are improving, which is a good sign for the economy. Right now staffing is improving in multiple sectors: light industrial, clerical, medical and professional.”

Good Times Ahead?

“IT will continue to grow in sync with ongoing demand for IT solutions,” states Leavenworth. “There will still be activity in light industrial, because a lot of the goods purchased by Americans are imported, and there are logistics jobs to move those goods out of the ports and across the country to store shelves. White collar industries are adopting the flexible staffing model, and we see growth in that sector as well. They seem to be adapting this model for the long term.”

“Staffing is ideal for making costs variable, and most companies are not eager to go back to a big payroll and fixed expenses and will instead look toward temporary staffing to supplement growth spurts,” says Rothman. “I think this is the new economy.”

“We are seeing more start up activity and new businesses that will increase competition for personnel,” insists Leavenworth. “Staffing firms need to pay close attention to social media in sourcing talent. It is no longer as simple as getting the phone register for a company and dialing through it to recruit talent. Many firms are desperately seeking JAVA programmers, which opens up new opportunities.”

“The staffing companies that are still here are wary, because they don’t know if the economic recovery will continue or not,” concludes Geyer. “Most are optimistic, however. A few years ago, there was low attendance at trade shows, but now people are attending in large numbers. There’s a positive note in their voices when they talk about what they are doing. They are putting on staff and talking about new initiatives. For someone like me, it feels great, because the industry is back.”