Updated January 6, 2020
Running any successful business is an arduous task, especially when it comes to staffing companies. This holds especially true as the business grows, and new and unforeseen challenges crop up regularly.
So, while it’s tempting to celebrate your wins and big contracts, you also need to be prepared with the capital you need to keep the ball rolling as you grow. Having the right financing in place will help you cover any critical gaps in initial cash flow, and it can help you avoid many of the headaches associated with staffing companies.
While there are plenty of different financing options available to you, not all of them are an excellent fit for staffing companies. Here are some tips and best practices for financing a staffing company, so you can focus more on growth and less on the headaches that come with it.
Secure Favorable Payment Terms
Regardless of how you plan on securing financing, one of the smartest things for any staffing company is to reduce your payment terms whenever possible. By lowering your terms, you’ll be able to further bridge the gap between the capital you have and the capital you need to cover your expenses and pay employees.
Of course, this is sometimes easier said than done. After all, wouldn’t you want the flexibility that comes with a 90 or 120-day window to pay invoices? Typically, when a company asks for extended terms like this, it was a signal of cash flow problems. Today, more successful companies are seeking flexibility from their suppliers.
For staffing companies, these extended payment terms can be a killer, and you’ll want to avoid them at all costs. Leverage your relationships to secure the most favorable payment terms with your customers to help reduce these gaps in cash flow.
It’s also helpful to establish clear objectives from the outset with all your new customers. Your business is not a bank, and that should be understood by all parties when you enter an agreement with a new customer. You’ll also want to make sure that the terms you expect the customer to follow are carefully outlined in the contract.
If those terms are violated, you’ll need to be vigilant in your collection efforts to ensure that things don’t become too far out of hand. It’s also helpful to partner with a trade organization like the National Revenue Corporation to give your collection letters some teeth when you sent them to clients.
Constantly Evaluate Your Relationships
As your business grows, the relationship between you and your clients is sure to change. By continually evaluating and refining these relationships, you can streamline your practices while also leaving the door open for the tough conversations surrounding payment you’ll need to have.
Sometimes, a strong relationship with clients means the difference between an invoice that’s paid early or on time, and an invoice that sits collecting dust for months on end. As a business, you’ll need to start cultivating this relationship from the outset. Develop a strong knowledge of the challenges and obstacles your clients face as a company before presenting them with your product solution. Do your research and ask the hard questions, your product(s) may not be the best fit at all for this client.
When your partners have a better understanding of your needs and cash flow requirements, they’ll be more sympathetic to terms that are favorable to all parties and aren’t just aligned with the client’s direct interests.
Consider Traditional Financing Options
Securing the best payment terms and developing strong relationships are great ways to address the complicated financing issues facing your business. Every business will still need to secure the necessary cash flow to bridge its initial financing gaps.
For many businesses, traditional financing options are the best way to secure the necessary cash flow to keep the lights on.
Bank financing is a reliable option for many businesses. At a bank, you’ll find access to the most extensive array of financial products for your business. Banks traditionally have the best rates out of any financing option.
There are a few caveats associated with bank lending.
For one, not every business will qualify for a bank loan that aligns with their needs and goals. The approval process can also be long and drawn out, which is a significant obstacle for most staffing businesses. Some loans also require that you submit regular financial statements to the bank to maintain your loan.
For these reasons, bank financing is not typically an option sought by staffing companies.
Payroll financing is another traditional option, and it’s one that many staffing companies find attractive. With payroll financing, a third-party will handle all of your payroll processes, including paying employees and taxes and handling claims. Payroll financiers will often scale with your business, offering more financing as your operation grows.
This financing option doesn’t come cheap, as most payroll financiers collect 3-5% of your gross billings for their trouble. Set up times also vary, and it can take anywhere from a week or two to several months for your agreement to take effect. Most agreements also involve contracts that contain minimums and penalties you’ll need to be aware of.
Payroll financing can also be challenging to secure for businesses with few assets or poor credit. But, it’s still a viable option for some staffing companies, and it can help free up your time since you’ll be delegating virtually all your payroll operations to a third party.
Less Traditional Financing Options
While bank loans and payroll financing are both options you’ll want to look into more closely; they rarely align precisely with the needs and goals of your business. For staffing companies, sometimes less traditional financing that’s specialized to your industry makes the most sense.
Invoice factoring has become one of the most popular financing methods since it provides businesses like yours with the most flexible and cost-effective solutions for improving cash flow. When you do business with an invoice factoring company, you’ll submit a copy of customer invoices to the factoring company, and they’ll advance you the majority of the invoice right away. When your customer settles the invoice, they’ll send you the remaining payment you’re due, less their fee.
Merchant cash advances are another highly sought after financing option. An MCA essentially provides funding to a small business owner in exchange for a percentage of the business income over a period of time. These are perfect for businesses with fluctuating revenue and lower credit scores. Payments are usually taken as daily payments tied to future sales. MCAs are easier to qualify for if your credit isn’t strong.
Vet Your Financing Partner Carefully
Regardless of the type of financing that makes the most sense for your business, it’s critical that you carefully vet any financial partners you are considering.
Keep in mind that not every financial product or service is going to align with your company’s interests, and some financiers have no concern for the challenges that face your business.
Just as you’ll want to study and refine your customer relationships carefully, you’ll want to do the same with your financial partners. Doing so will help keep you and your partners on the same page as you work towards your goals.
For staffing companies, securing the right type of financing is often the difference between meteoric growth and failure. As you work to decide on the best solution for your business and use these tips to guide you on your way.
Invest in learning about the best option for your needs and goals, and you’ll have the tools and financing you need to continue to grow.
Director, Marketing & Strategic Partnerships at Credibly