Making payroll is the most critical task for any growing labour hire agency. You can retain high-quality talent only if you offer good salaries, good jobs, and you pay on time. However, cash flow problems jeopardize your ability to pay employees on time and prevent your business from reaching its true potential. In this article, we cover:
- What is the source of the problem?
- Why growth makes the problem worse
- Using early payment discounts
- What is payroll financing?
- Advantages and disadvantages
- How much does it cost?
- Is payroll financing right for your labour hire agency?
- How to use it effectively
1. The problem: why payroll is a challenge
Most labour hire agencies encounter financial problems at one time or another. These problems commonly affect companies that are just starting. However, they also affect companies that are adding new clients and growing quickly. This scenario can be insidious, as the company runs into financial problems just as things apparently improve.
Cash flow problems often occur because revenues are delayed. Most agencies have to offer net-30 payment terms to their clients. Large clients often demand terms as a condition of awarding a contract. Payment terms can give your clients up to two months to pay you.
However, your employees and suppliers must be paid regularly. Most employees need to be paid weekly or on a fortnightly basis, and suppliers expect to be paid immediately. Consequently, you have to pay these expenses out of your cash reserve and wait for clients to pay on their usual 30- to 60-day terms.
Unfortunately, there is another problem. Most labour hire agencies don’t have an adequate cash reserve nor do they get many opportunities to build one. Consequently, they can easily overextend themselves and experience financial problems.
2. Growth can backfire
Most agency owners believe that they will be able to grow out of their financial problems. After all, sales should bring in revenues. This isn’t always the case as sales growth doesn’t always work as you’d expect. Growth comes in spurts and is seldom smooth and predictable. Furthermore, your new customers still take 30 to 60 days to pay. This delay has the unfortunate effect of increasing the demands on your cash reserve.
Ultimately, the gap between your cash on hand and your expenses grows. This gap can lead to missed payroll payments. In general, once this happens, the business spirals out of control unless the problem is addressed quickly.
3. Early payment discounts improve cash flow
If your labour hire agency’s slow-paying clients create cash flow problems, consider offering early payment discounts. They are a practical solution that can improve your cash flow quickly and increase client satisfaction.
As their name implies, early payment discounts work by providing your client with a discount in exchange for a quick payment. The most common option is to offer a 2% discount if the client pays in 10 days. Otherwise, they must pay the invoice in full.
Discounts are negotiable, so it is to your advantage to negotiate the lowest possible discount for the fastest payment. Common options include:
- 1%/10 – net 30
- 1%/10 – net 60
- 2%/10 – net 60
a) They are optional
While we advocate offering discounts for early payments, they have a limitation. These payments are optional. Consequently, your clients choose if and when to pay quickly. It’s common for clients to stop taking the discount and revert to paying slowly when the economy takes a turn. Coincidentally, that is when you need quick payments the most.
b) Offer discounts carefully
Offer early payment discounts only to your best clients. It is tempting to offer them to your worst-paying clients, but that strategy can backfire. A financially troubled client who is also unscrupulous could opt to take the discount and pay slowly anyways. This customer behaviour happens often enough to warrant concern.
4. What is payroll financing?
Payroll funding allows labour hire agencies to finance their slow-paying invoices from creditworthy clients. This tool solves the cash flow problems created by slow-paying invoices. Payroll financing provides the agency with the funds it needs to meet payroll and supplier expenses.
Most small and growing labour hire agencies finance their payroll using invoice finance. However, larger labour hire agencies can use other options.
This solution is offered by specialised companies and work in similar ways. In most cases, the company finances your invoices in two instalments.
The first instalment is referred to as the advance and covers 70% to 85% of the invoice. It is deposited in your bank account as soon as the invoice is financed. The remaining 15% to 30%, less the finance fees, is deposited to your bank account once the invoice is paid in full. This second instalment settles the transaction. Read “What is payroll finance? How does it work?” to learn more.
5. Advantages of using payroll financing
Using invoice finance to fund payroll has several advantages over other solutions. These benefits include:
- Improves cash flow issues due to slow-paying receivables
- The line increases as your business grows
- Provides quick access to funds
- Has simple qualification requirements
6. How much does payroll financing cost?
The rates for payroll financing depend on which solution you get, the size of your line, the quality of your clients, and how long they take to pay. The are two main costs. The administration fee goes from 0.80% – 2.5% and covers the cost of managing the invoice. The interest rate fee, which varies, and is charged on the utilised funds. Read “How much does invoice finance cost?” to learn more and see an example.
7. Using payroll financing effectively
There are several ways your agency can use payroll funding effectively. Consider discussing this with your financial team. A common strategy is to initially rely on payroll financing while the labour hire agency builds a cash reserve. As the reserve grows, you can rely less on financing, which increases your margins. It’s often a good idea to keep a financing line as a backup reserve or to handle rapid growth.
8. Is invoice finance right for your labour hire agency?
Payroll funding is designed to solve a specific problem. It can help your agency make payroll and improve its cash flow if your:
- Main problem is that commercial clients pay slowly
- Clients pay in 30 to 60 days – and –
- Clients have good commercial credit
Looking for payroll finance?
We are a leading provider of payroll financing and can provide a competitive proposal. For more information and a quote, please fill out this form.