There is a need for working capital by temporary employment agencies and staffing firms to cover payroll, onboarding, hiring, and recruitment expenses. However, they must make payroll every two weeks even though clients typically have 30 or longer net terms. As such, staffing firms can rely on staffing factoring to close the gap between cash outflow and inflow.
Companies can sell their accounts receivable at a discount to a third-party business using staffing factoring. A bank can purchase the receivables, and with that, the company can monetize factoring within two to three days.
When a factoring company factors an invoice, they will assume the payment collection responsibility. This arrangement can be a temporary or permanent basis. The factoring company will get their fee from a small percentage of the total invoice amount. Spot factoring is when a factoring company purchases small invoices from a company. They can also buy all of them, which is full-turn factoring or ledger.
How Does Staffing Factoring Works
With staffing factoring, businesses can obtain immediate cash by converting outstanding invoices. Companies make no payment with factoring, which makes it different from a credit line or term loan. The company sells their receivables at a discount to a factor. Therefore, the customer will pay the invoice to the factors and not to the company directly.
The factoring company will collect the invoices since the recruiting firm is selling their unpaid invoices. This shift in billing responsibilities is another payroll factoring perk to many companies.
Companies That Will Benefit from Staffing Factoring
Payment for an agency’s invoices may be unpredictable because of the wide range of recruited positions and industries they serve. Staffing agencies can overcome their cash flow management problems through payroll factoring. A staffing company may want to rely on factoring for the solution if it has $5,000 to $50,000 outstanding invoices in a month.
Some of the businesses that use staffing factoring are:
- Human resources consulting firms
- Healthcare staffing firms
- Temporary agencies
- Information technology staffing agencies
- General staffing agencies
An increasingly crucial lifeline is payroll factoring for the staffing industry. Placements would have been made on the job for about two weeks before agencies can receive any payment. Sometimes, it could be about three months for executives.
The Process of Payroll Factoring
When a company has unpaid invoices, it can get the necessary funding through staffing factoring, which is typical of traditional loans. However, what differentiates it from traditional loans is that the company will not have to pay the lender. The company will get around 80 percent to 90 percent of their invoice value in advance. The lender will then take out the factor’s fees when the client pays and send the company the remaining amount.
Here are the conventional steps companies use in invoice factoring:
- The company invoices their customer, and it must be 90 days or less to be eligible for factoring.
- The company then assigns the invoice to the factor.
- The company gets the payment in advance from the factor.
- The company’s client pays the invoice directly to the factor.
- The factor sends the balance after taking their fee.