Robinn Mikalic
Business Development Officer, Flexible Funding
The good news for job seekers is the unemployment rate is at a 49 year low. The bad news for companies is the cost of finding and hiring new employees is skyrocketing. Robinn Mikalic explains how staffing companies benefit from payroll funding, a type of factoring tailored towards the staffing business.

People need jobs. Companies need employees. And the staffing industry brings them together. Whether for temporary or seasonal assignments, contract engagements, or permanent placement, the staffing industry gives employees a bridge to permanent employment, and it gives businesses the skilled labor and flexibility to create effective workforce solutions faster than trying to search and acquire direct employees.

According to the American Staffing Association, the staffing, recruiting, and workforce solutions industry makes a vital contribution to the U.S. economy, and provides outstanding job and career opportunities for nearly 17 million employees per year. The industry contributes more than $160 billion to the U.S. economy through temporary and contract staffing, recruiting and permanent placement, outsourcing and outplacement, and human resource consulting. Most (76%) work full time, comparable to the overall workforce (82%). Half (49%) of staffing employees say it’s an avenue way to obtaining a permanent job. Nine out of 10 said staffing work made them more employable. One-third (35%) were offered a permanent job by a client where they worked on an assignment, and two-thirds (66%) of those accepted the offers of permanent employment.1

Temporary staffing employees work in virtually all occupations in all sectors: 37% Industrial, 28% Office–Clerical and Administrative, 13% Professional–Managerial, 13% Engineering, Information Technology, and Scientific, and finally 9% Health Care.2

Low Unemployment Creates Job Crunch

The U.S. unemployment rate has been on a downward trend for a decade, dropping from 10% in the throes of the Great Recession of 1929 to a 49-year low of 3.7% in September 2018. Although it has started to tick up slightly in more recent months, there are still more jobs than people to fill them. The number of job openings are still near a nearly two-decade high of almost 7 million, outnumbering the 6.5 million people who are officially classified as unemployed. The rate is unlikely to fall much farther, however, because the U.S. is unlikely to keep adding more than 200,000 new jobs a month given the already tight labor market and somewhat softer growth home and abroad.

So, with so much of our economy relying on temporary staffing for employee placement, Staffing companies must secure financing for such rapid and steady growth. That is where payroll funding comes into play. Those of us in the payroll funding business have seen an uptick of clientele in the past several years.

Payroll funding is invoice factoring specifically for the staffing industry. Working capital financing, advance payroll funding, and invoice financing all refer to the same process. Sometimes payroll funding will pair with other backroom services, such as payroll processing, tax obligation reporting and state regulation management.

As more and more employers are turning to temporary staffing services to meet labor demands, temporary staffing companies must strive to stay on top of their finances to ensure efficient and timely operations. For every new hire, the average business needs $1,000 to $2,500 or more in working capital weekly until the business receives payment from its customer. If the average customer pays in six to eight weeks, and the company adds 10 new employees, the capital needed can be anywhere from $60,000 to $200,000. Payroll funding or invoice factoring for temporary staffing can be the likely key to increasing a company’s cash flow. By converting unpaid invoices into immediate cash, payroll funding can help staffing company’s make payroll with ease.

Growing businesses often find that staffing needs outpace revenue growth. Small businesses often have a temporary cash-flow shortage. Businesses need funding for seasonal staff. Businesses opening new locations needing additional staff. As temporary staffing businesses grow, hiring staff may outpace revenue and factoring or payroll funding can help overcome the gap.

A typical staffing business will start borrowing from friends and family, but without stable cashflow, the business owner will hold off opportunities to expand, make office lease payments, pay workers’ compensation insurance, pay taxes, and most importantly, hire and keep new talent. A growing staffing company could possibly hire five to 10 people per week. With payroll funding to support personnel growth, a business is able to triple its headcount.

On the lending side, this type of financing does have some risks and careful consideration should be taken. Risk in financing a staffing agency’s accounts receivables can be extremely high. The security or collateral for the loan is only paper — invoices and timecards. If something goes wrong, staffing agencies do not have heavy equipment such as inventory to lien and liquidate. The IRS has super priority liens that can, under certain circumstances, get ahead of a payroll financing company.

Possible Lending Risks

The funding company can quickly be out of pocket for tens or hundreds of thousands of dollars. Fraud, embezzlement, and other white-collar crimes are widespread. Most staffing agencies are not well capitalized. Legal costs are too high and the court systems are much too slow to fix problems cost effectively. Credit is too fast of a moving target and much of the credit data available these days is less than dependable. Lastly, a funding company’s own investors and/or banks usually don’t approve a full advance and lend a true 100% to staffing agencies. The loan often is a lower amount, with some sort of reserve, typically 90%. A funding company needs to be a specialist, with tight control and diligent processes, as they are funding on movable assets.

For the staffing business, there are many benefits of securing payroll funding. A business could enjoy unlimited access to funds as they grow exponentially, always have funds available to meet payroll, quickly improve the businesses cash flow, and allows a business to offer net-30 terms to clients. Payroll funding is typically easier to get than a business loan, faster to get than conventional financing, and financing line increases as a business grows. Finally, this is a non-debt product since it is typically processed as a true asset purchase, simply buying the paper, or movable asset, and not lending against directly. Most staffing agencies have a heathier balance sheet, and positive cash flow and a business owner can actually take a paycheck of their own in the very first year, which is a real treat for an owner! •