To Bank or Not to Bank?
Cash Flow. For many staffing firms, these are dreaded four-letter words. There are few other industries in which your product (your temporary workers) has to be paid for (over and over again) before your client pays you.
In fact, the need to meet payroll in advance of collecting receivables has put many staffing companies out of business. Bad debt. A slow-paying client. Or even rapid growth can all tax your working capital beyond your limits.
When you started your staffing agency, obtaining a line of credit from the bank to help you with cash flow may have the logical choice. Today, owners are beginning to understand that they are able to take advantage of the increased specialization in the lending and funding world to achieve greater flexibility and in some cases a more cost-effective solution to their business needs.
Let’s look at some of the ways to address your cash flow needs.
OPTION 1: TRADITIONAL BANKS
Banks don’t love the staffing industry – they don’t really understand the industry. We don’t have brick-and-mortar or other tangible assets they can lend against. While many banks will offer a line of credit supported by receivables, they will typically only lend up to 75 percent of the receivables balance, up to a fixed limit. And if you don’t have a multi-year track record of profitable business (and a strong balance sheet), they won’t touch you at all.
While most staffing firm owners tend to prefer bank financing because they perceive that it is less expensive. In reality, there are usually application fees, examination fees, unused line fees, required covenants that you will be required to hold to and report on – the total costs can be much higher and difficult to gauge. Beyond that,there are simply certain circumstances where bank financing will not work:
- When you are growing very quickly. The unfinanced receivables that the bank doesn’t cover has to be funded somehow
- When you need to take on a new major account. Banks like to have a history to rely on.
- When you have clients (like Fortune 500 companies) that take 60, 90 or even more days to pay. Most banks will exclude receivables that are in excess of 60-90 days.
- When a major account defaults on your receivable.
In all these situations, you’re likely to need more than 75 percent of your receivables balance in working capital in order to keep your doors open.
OPTION 2: CREDIT CARDS AND PERSONAL LINES OF CREDIT
If your cash flow need is relatively small and short-term, you may be able to bridge the gap with credit cards, a second mortgage on your home, or a home equity loan. While all of these options can provide rapid access to capital, the amount of cash you can access is limited and extremely expensive
If you are in a rapid growth situation, none of these solutions will allow you to scale your payroll, and ultimately, your lack of access to working capital will put your business at risk.
If you need financing because of a slow-paying or high-risk client, these options could put your future personal financial well-being at risk.
While credit cards and personal lines of credit have been used by entrepreneurs everywhere to fund startup operations, they are generally inadequate to support the growth of a staffing business. The cash flow demands are simply too great.
OPTION 3: FUNDING COMPANIES
A funding company is a business that exists to provide working capital (and often other services) to businesses. Funding companies will purchase your receivables at the time you send your invoices, so you get immediate access to the cash you need to pay your payroll. The funding company then takes care of collecting the receivables, and they will charge you a percentage of the invoice value for their services.
A typical funding company will give you instant access to 80-90 percent of your receivables. They hold back the remaining percentage until the receivables are actually collected. Once collected, they will pay you the remaining balance, less their service fees.
Fees can range greatly, and the cost will vary by provider and the riskiness of your business (i.e., the specialty niche markets you serve, the type and size of clients you have, and your firm’s credit history).
The biggest advantages of funding companies include:
- Immediate access to cash to finance payrolls.
- Greater scalability – no limit to your growth.
- A partner in assessing client credit and managing collections.
THERE’S MORE TO CASH FLOW THAN CASH
With bank financing, your business gets access to a line of credit that can be used to fund payroll or for other purposes. But cash is all you get.
Back office services. A premier staffing services company like Madison Resources offers a full range of back-office support services. While you are not required to use these services, they eliminate significant amounts of administrative burden, so you can focus more time and energy on sales and recruiting.
These services include:
- Payroll Processing
- Billing, credit and collections
- Online reporting
- Payroll tax processing
- W2 processing
These additional services save time, ensure accurate processing of invoices, payroll and payroll taxes, and keep you in compliance with federal and state payroll regulations.
Staffing technology. The rare funding company will provide an even higher level of support, offering Applicant Tracking Systems (ATS) and other technology solutions to help you manage sales, recruiting and financial analysis.
At Madison Resources, we provide our clients with a powerful suite of software tools that includes:
- ATS/CRM
- Online payroll processing
- Online timecards and pay stubs
- Profitability & financial analysis
- ACA calculations
- Mandatory Sick Pay calculation
Strategic Advice. Cash flow is essential to your growth. So is expert advice. When you’re looking to grow your business, deal with a problem client, or simply your business better, you want a funding partner that has relevant experience and insight.
When deciding on a bank or funding company, look for a firm that specializes in the staffing industry — one with a long history of supporting organizations that are similar to yours. Look for a firm that is committed to helping you become more successful.