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Is your staffing firm struggling with cash flow problems or finding it difficult to cover essential expenses like payroll? You may want to get a cash flow boost through staffing factoring. In this article, we’ll walk you through some of the reasons why staffing companies often struggle with cash flow, plus explore why traditional funding solutions don’t always work and how invoice factoring fills the gaps they leave behind.

Reasons for Cash Flow Problems

Simply put, a staffing company is said to have cash flow problems when its cash outflows exceed its cash inflows, or there’s a very small margin between them. There are many reasons small businesses may struggle with working capital. A few common examples include:

Slow and Late-Paying Customers

Your expenses don’t stop accruing when work is complete, or an invoice is sent. So, the longer it takes for clients to pay, the more bills and interest your company racks up while waiting.

Startup Phase/ Fast Business Growth

As demand for your staffing company’s offerings grows, your backend expenses grow too. Oftentimes, these exceed what you might otherwise have coming in and leave you with a funding gap.

High Overhead Expenses

Recruitment, payroll, and other expenses can really add up, leaving you with even thinner margins than you might otherwise have.

Low Profit

Sometimes low profit is caused by issues like undercharging for your services, but you might also experience it during slow seasons and for other reasons beyond your control.

Over-Investment in Resources

Occasionally, staffing firms gear up for a busy season that isn’t as strong as expected or a job that doesn’t come. The recruitment and office expenses can easily weigh you down.

Unnecessary Inventory Purchases

Without a doubt, you have equipment and supplies to procure, but if you’re purchasing more than you need at the moment, it can seriously drain your cash reserves.

Unexpected Expenses

From broken computers to replacing the occasional bad hire, unexpected expenses are especially difficult to plan for in the staffing industry.

Poor Financial Planning

Forecasting and planning issues create cash flow issues a business might not otherwise experience.

Late Payment of Vendors/ Overdue Payment Fees

Late and missed payments to vendors can leave you with additional fees or cost your business discounts, reducing your cash on hand even more.

Why Traditional Financing Options Don’t Always Work

Businesses often turn to traditional lending options when they don’t have enough cash. Unfortunately, things like bank loans and lines of credit are only a viable option for well-qualified and established businesses. Overall, just 37 percent of businesses that apply for financing receive the full amount requested, according to the latest Small Business Credit Survey. Those who fall into the low-risk category are fully funded 45 percent of the time, while medium-risk applicants receive full funding 22 percent of the time, and high-risk candidates are fully funded seven percent of the time.

This clearly leaves a considerable funding gap as it is. Still, it’s important to note that 30 percent of business owners with unmet financial needs don’t even bother to apply for reasons like debt aversion and being discouraged from applying.  

What is Factoring and Payroll Funding?

The staffing industry typically has thin margins and unusually long waits for client payments. Unlike other industries that might be able to purchase raw materials and turn those into sellable goods in a short amount of time, staffing companies must invest in recruiting, infrastructure, and more before talent can go to work. While the team must receive prompt payment, the staffing company may not receive payment on invoices for 30-90 days or more. The issue may be even more pronounced with temporary staffing agencies, as workers often receive daily or weekly pay. The constant and hefty outflows can easily drain staffing companies even if they’re overall profitable and make it that much more challenging to meet other financial obligations and grow.

Factoring turns your accounts receivable into instant cash. Staffing firms often choose to use it as a form of payroll funding because paying employees or contractors is the largest and most crucial expense, but you can spend the money on whatever makes the most sense for your business.

How Does Factoring for Staffing Companies Work?

When you work with a factoring company, it purchases your unpaid invoices. You’ll receive a portion of the face value of the invoice upfront—usually 60-80 percent, though Viva advances up to 100 percent in some cases. The process typically follows a standard flow as outlined below.

  1. Send your talent to work.
  2. Submit a copy of the invoice to your factoring company.
  3. The factoring company purchases the invoice and sends you cash.
  4. The factoring company waits on payment from your client while you move forward.

Advantages of Invoice Factoring for Staffing Companies

Factoring provides cash for payroll processes, payroll taxes, office supplies, and all the other things involved in running a profitable staffing company. In addition to this, you’re also likely to receive:

Quick Payment

Unlike traditional forms of business financing, factoring can provide you with cash on the day you submit your invoice.

Easier Approval Compared to Traditional Funding

Invoice factoring is not a loan, so it’s not subject to the same underwriting guidelines you experience with traditional funding sources. As a result, it’s easier to get approved.

Client Credit Checks

The creditworthiness of your clients is weighted more heavily than your own when you’re factoring since they’re ultimately the ones paying the invoice. For this reason, factoring companies will often perform credit checks for you, which provides added assurance your clients will pay as expected.

Flexible Funding

You can generally factor as much or as little as you like.

Debt-Free

Because your clients are expected to pay their invoices, there’s no debt for you or your staffing firm to pay off.

Fund Payroll and Other Staffing Company Expenses with Viva

In addition to all the benefits outlined above, Viva offers specialized factoring programs, low rates, high advances, and other services that can help your staffing firm run smoother and more profitably. If your business is struggling with cash flow problems, connect with a Viva factoring specialist and request a complimentary rate quote.

Armando Armendariz

Armando Armendariz, Director of Business Development and Partner of Viva Capital, facilitates new business, establishes referral partner relationships and oversees sales—over 15 years of experience in banking, finance, and business entrepreneurship.