Factoring can be a great financial tool for your staffing business, assuming you use it wisely.
Put simply, factoring is a financial transaction where a third party (commercial lender or bank) turns an accounts receivable (invoice) of a business into cash. In other words, you can sell your invoices for cash if you can't afford to wait for the original payment from your client. You may think of it as a cash advance. The accounts receivable are sold at a discount to the lender, and your business will usually receive 80-90% of the original invoice up front, then the remaining balance when the invoice pays, less the lenders fee.
Why would you want to do that?
The most common reason a staffing company would finance its accounts receivable is to create more available working capital to operate their business. Generally, staffing employees or contractors expect to be paid weekly, yet client invoice payments are typically received from 30 - 60+ days from the invoice date. By utilizing factoring, the staffing company will receive cash right away that can help them meet their short-term working capital needs, including payroll, payroll taxes, and other cash requirements.
But aren't there other ways?
Yes, of course. You can take out a bank loan or work with a venture capital group. Factoring can typically be easier to obtain than bank financing or venture capital funds, as the emphasis is not on the company's total assets or cash flow, but on the value of the accounts receivable. Factoring is also a cheaper and faster option than enlisting the help of a venture capital group. Venture capitalists take a lot longer to deliver their funds, and require an equity stake in the company.
When Should You Consider Factoring?
The primary purpose of receivables financing (factoring) is to help you better manage your cash flow. It should be considered under circumstances where you can't address cash flow shortages with lower cost financing sources, and when the incremental cost of A/R financing is less than the economic benefit you will receive by increasing your available cash flow.
For example, let's say you have a great customer who asks you to extend their payment terms, to 60 days instead of 30. Can you afford to wait an extra 30 days to get paid? Factoring would allow you to provide longer terms to that customer and at the same time continue to grow your staffing sales with that customer without putting any of your other business assets at risk.
What if you had a sudden, unexpected spike in sales, and lacked enough working capital to add the additional employee headcount to deliver on your job orders? By factoring your existing and new accounts receivable to generate cash, you'd be able to make the sales and keep the incremental gross margin, which should exceed the incremental cost of financing part or all of your accounts receivable.
When you have a bit of a downturn or slow time in your business cycle, if you need cash to meet your short term operating demands, you can factor a portion of your receivables to assist with a cash flow crunch.
The decision to use factoring should always make good economic sense. If used properly, it should help create the size and profitability necessary to acquire lower cost sources of financing in the future.
If you would like to discuss your situation, please contact Dale Busbee, Vice President of Business Development, Prosperity Funding at dale@prosperityfunding.com or by phone at
