Staffing factoring, also known as payroll factoring, is a financing tool for staffing agencies that converts unpaid invoices into immediate working capital. Staffing factoring companies will typically advance 85% to 90% of an invoice’s value immediately. The remaining balance will be given to the staffing agency, minus the factor’s fees after the client has paid the invoice in full.
Staffing agencies looking for a factoring partner may want to consider BlueVine, our top-rated factoring provider. BlueVine offers invoice factoring up to $5 million per month with low minimum requirements. The entire application can be completed online and takes less than 15 minutes.
What Is Staffing Factoring?
Staffing factoring is financing that converts outstanding invoices into immediate cash. Factoring is different from a term loan or line of credit in that you make no payments with factoring. Your receivables are sold, at a discount, to a factor. Your customer pays their invoice by sending their payment to the factor instead of your business.
Because you’re selling your unpaid invoices, the factoring company assumes the responsibility for collecting on the invoices. Many businesses see this shift in billing responsibilities as another perk of payroll factoring, and factoring is essentially a way to outsource an accounts receivable (A/R) department.
Who Staffing Factoring Is Right For
Due to the wide variety of positions recruited for and industries served, an agency’s invoices can be paid at unpredictable times. Payroll factoring helps staffing agencies overcome their cash flow management issues. If you are a staffing company with $5,000 to $50,000 per month of outstanding invoices, factoring may be the solution for you.
Staffing factoring is commonly used by:
- General staffing agencies
- Information technology (IT) staffing agencies
- Temporary agencies
- Healthcare staffing firms
- Human resources (HR) consulting firms
For the staffing industry, payroll factoring has increasingly become a critical lifeline. Agencies typically aren’t paid until placements have been on the job for two weeks and, sometimes, three months for executives. That’s a long time to wait for the cash you need to run your business.
This problem can hurt agencies looking to put contract workers, or temporary employees, into another organization. They will typically give 30- to 90-day terms to the business they’re working with but still have to pay these workers in the meantime. However, it can also hurt large executive recruiting firms who often work on a small retainer before they even know if they’ll be paid.
“Recruiting companies that are using a direct hire model won’t have the ongoing payroll obligation of a staffing agency, which can make managing cash flow easier. However, they aren’t without their own challenges. For example, the recruiters will usually be working on commission only.
“In some markets, or for those placing executive-level talent, they may be able to negotiate receiving a retainer in addition to their commission. Still, considering that commissions are reliant on a successful 90-day or longer trial period, that can mean having to float your small business on a 5% to 10% retainer before knowing you’ve locked the 30% to 40% commission. If you offered net terms, locking the position might only start the clock on the 30- to 90-day terms you extended. That’s often further than a 5% commission can stretch.”
—Christy Hopkins, Owner & Principal Consultant, 4 Point Consulting
Some executive firms may not be able to use staffing factoring until after they’ve placed an employee, but all temp agencies will be able to use a staffing factoring product as soon as they place workers. Either way, staffing factoring has become a lifeline for the industry to help them keep their expenses in check while they wait for their customers to pay.
How Payroll Factoring Works
Staffing factoring, like traditional invoice factoring, works by funding you upfront for your unpaid invoices. Unlike traditional loans, you generally don’t have to make payments to the lender. The lender will advance you 80% to 90% of the value of your invoice, and pay you the remaining amount, minus the factor’s fees when your client pays.
There are traditionally five steps in invoice factoring, which are:
- Invoice your customer: The first step in the process is to invoice your customer. The net term on the invoice must be 90 days or less for it to be eligible to be factored.
- Assign the invoice to the factor: The invoice is then assigned to the factor company. In the case of spot factoring, you can choose which invoices you want to factor while with contract factoring, you agree to factor all of your eligible invoices.
- The factor pays you an advance: Once the invoice is assigned to the factor, the factor company will pay you up to 90% of the invoice, depending on the agreed-upon holdback percentage.
- Your client pays the invoice directly to your factor: Your customer remits their payment for the invoice directly to the factor company.
- The factor takes their fee and forwards you the balance: Once the factor company receives the payment from the customer, the factor company retains their fees and sends the remainder of the holdback back to you to finalize the process.
Staffing Factoring Rates, Terms & Qualifications
As with all invoice factoring, getting the best rates and terms depends not only on the volume of your invoices and how creditworthy your clients are but also the factor’s experience in your industry. Rates, terms, and qualifications required vary between factor companies. It’s important to find best invoice factoring company that best suits your specific needs.
Staffing Factoring Costs
Staffing factoring is a short-term financing solution, typically having a low total cost of capital, but a high annual percentage rate (APR) as is standard with short-term financing. Two primary components determine what the overall cost of staffing factoring will be for your business: the discount rate and how quickly the invoices are paid, along with any additional fees, if included:
- Discount rate: The discount rate, sometimes called the factor rate, is the primary cost of factoring your invoices. The discount rate is a percentage of the value of your invoice that is charged as a flat fee or on a weekly or monthly basis for the period your invoice is outstanding.
- How long it takes your client to pay off the invoice: Many larger factor companies have a tiered system that lowers your costs based on how much you factor each month and how fast the invoice is paid off. If you do a lot of factoring and your customers typically pay within 30 days, then you’ll generally qualify for the lowest rates.
- Additional fees: Additionally, many factors have other fees, which makes it essential to read and understand your factoring agreement thoroughly before you submit any invoices. These fees can range from a simple $15 wiring fee to an origination fee of $500.
The table below is an example of what your costs could look like when you borrow money through invoice factoring if you’re not charged any additional fees.
Staffing Factoring Costs Example
Staffing Factoring Repayment Terms
This is what the staffing industry tends to like best about staffing factoring: there isn’t a defined repayment term. The only payment owed to the factoring company is the payment owed by your client. Your factoring fees are netted from the remainder of the advance when the invoice is paid in full by your customer.
If your customer has not paid the invoice on time, the payroll factoring company may ask you to help get your customers to pay. If they are still unable to collect on the bill, you may be held liable for the debt. Staffing factoring is typically recourse factoring, meaning if your customer becomes unable to pay, then the factoring company will look to you to pay back the advance amount you received.
Staffing Factoring Qualifications
Typical qualifications for staffing factoring include having a minimum of $30,000 per month of invoices due within 90 days and having been in business for two or more years and without serious legal or tax problems. Your customers must also be deemed creditworthy by your factor. A history of prompt payments from a customer makes factoring their invoices easier.
The typical qualification requirements for staffing factoring are:
- Invoices: Sufficient invoices due within 90 days to meet the minimum threshold of the factoring company.
- Time in business: Generally at least two years, although some providers have more lenient requirements.
- Creditworthy customers: Invoice factoring relies on your customers paying their invoices for the borrowed funds to be repaid; some companies even offer better rates if your customers pay faster.
Top Staffing & Payroll Factoring Companies
Next day unlimited funding online
Next day funding up to $5 million
Businesses seeking nonrecourse factoring in amounts ranging from $25,000 to $10 million
Businesses that need $30,000 to $5 million and have net terms of 30 days or less
FundThrough offers invoice factoring with no minimum or maximum funding amount. It also has no minimum credit score, time in business, or annual revenue requirement. It charges a flat fee and advances 100% of the invoice value. Business owners can upload an invoice and verify the customer to get funding online.
BlueVine offers the lowest advance amount of any of the providers on this list. You can receive advances ranging from $5,000 to $5 million on invoices monthly, with discount rates starting as low as 0.25% per week for qualified borrowers. BlueVine advances 85% to 90% of the value of your factored invoices. To qualify, you need a credit score of at least 530, $100,000 in annual revenues, and three months of business operations.
Paragon Financial Group
Paragon Financial Group offers nonrecourse factoring in amounts ranging from $25,000 to $10 million with monthly discount rates between 1.25% to 2%. Paragon Financial Group will advance 80% to 90% of your invoice value. Paragon does not have any formal requirements for credit or time in business to qualify.
With altLINE, you can receive advances of $30,000 to $5 million on invoices monthly, at discount rates ranging from 0.75% to 3.5% per invoice. Rates are set based on the timeliness of customer payments. The faster your customers pay, the lower the rates you will be charged. altLINE requires that you factor a minimum of $30,000 in invoices monthly.
Pros and Cons of Staffing Factoring
With the often unpredictable nature of customer payments, staffing factoring can ease a company’s cash flow woes by taking the guesswork out of when a customer will make their payments. Alternatively, staffing factoring could become burdensome if your customers don’t pay their invoices promptly.
Pros of Staffing Factoring
- Getting paid quickly: Once you’ve been approved for any invoice factoring, you’ll typically get your funds within 24 hours of assigning an invoice
- Ability to take on new clients: Some firms need to get paid on their previous work before they can afford the costs of new clients; staffing factoring solves this problem by providing funds before your customers paying their invoice
- Focus on growing your business: Larger firms can use invoice factoring as a way to completely outsource their A/R process; this could save company time and resources that can then be refocused on growing your business
- Have predictable cash flow: Service businesses tend to have an erratic cash flow cycle due to the unpredictability of when their clients will pay invoices; factoring all of your invoices will give you the knowledge of exactly how much money you’re getting and when
- Offer competitive salaries to clients: Many temp agencies find themselves without the cash needed to pay temporary employees a competitive wage; better cash flow can make offering competitive wages easier to do
Cons of Staffing Factoring
- Being charged a fee: In exchange for the advance on your current invoices, you agree to pay a fee; the invoices are for work that has already been done, and/or goods that have already been sold; the fee, which is typically between 1% and 5%, can add up over time
- You may be liable for payments: If you have a recourse agreement with your factor company, you are responsible for the amount of the invoice if your customer fails to make their payment
- Your credit doesn’t determine your rates: In many cases, your rates are determined based on the creditworthiness of your customers; the more promptly your customers pay their invoices, the better the rates that you are eligible for
Alternatives to Staffing Factoring
Staffing factoring is generally going to come from larger financial institutions that want to partner with firms that are looking to factor a minimum of $5,000 to $50,000 per month. Smaller staffing agencies, or those who are relatively new, may want to consider seeking an A/R financing company, or a short-term business loan.
1. A/R Financing
Small to medium-sized firms looking to do fewer A/R financing than some factoring companies require can get their cash flow needs met by partnering with firms for A/R financing. If you would like to review other A/R financing possibilities, read our article featuring the best A/R financing companies.
2. Short-term Business Loans
Another financing option for staffing agencies that are looking for a boost to their working capital is a short-term business loan. With a short-term loan, you receive the entire amount of the loan upfront, and your monthly payments and repayment term are fixed, providing you with an increased ability to budget for the cost of capital.
Staffing Factoring Frequently Asked Questions (FAQs)
How does business factoring work?
Factoring is a financing method in which your invoices are sold to another company, called a factoring company. The factoring company advances you a percentage of the invoice immediately, and the remainder when your customer pays the invoice. This gives you access to the invoice’s value as working capital before the invoice is paid.
What is payroll factoring?
Payroll factoring, also called staffing factoring, is financing that converts outstanding invoices into immediate cash. Your current invoices are sold at a discount to a factoring company. The factoring company issues you immediate payment of your invoices, and your customer then pays their invoice by sending their payment to the factor instead of your business.
What is a factoring company?
A factoring company purchases invoices from another business at slightly reduced or discounted value. In exchange, the factoring company pays the business for a percentage known as the advance rate, which is typically 85% to 90% of their invoice upfront and pays the remainder when the business’ customer pays off the invoice in full.
Staffing factoring can help staffing agencies of all sizes overcome short-term cash flow gaps by getting paid for invoices upfront, without the worry of when their customers will pay their invoices. This makes it convenient for both established and growing businesses that need access to cash sooner.