Summary: Most hospitality staffing agencies can be very profitable. However, they typically operate with very tight cash flows. This situation puts small and growing staffing agencies at a disadvantage compared to their larger competitors.
This article discusses several strategies to solve this common problem, from improving your business to financing operations. We cover the following subjects:
- Do you have this problem?
- Simple tips to improve your business
- Improve cash flow with payroll financing
- Advantages of using factoring
- Do you qualify for payroll financing?
- Stepping stone to other products
1. Do you have this problem?
Hospitality staffing companies typically work with hotels, restaurants, senior care facilities, and similar establishments. These types of businesses can make great clients and provide your agency long-term work.
However, there is one drawback. Most hospitality clients usually ask for net-30 to net-60 payment terms. Net payment terms give clients one to two months to pay their invoices.
Payment terms are not a problem for larger and better-established staffing agencies. These agencies typically have a large cash reserve or access to a line of credit. These resources allow them to handle business expenses while waiting for payment. Things are different for smaller agencies, though.
a) New and growing staffing agencies
Offering payment terms can create cash flow problems for new and growing staffing agencies. These agencies don’t have the financial resources of their larger competitors. Consequently, they are vulnerable to financial problems. This situation can become a “catch-22,” since these financial problems prevent the agencies from growing.
The problem is relatively simple. Employees are usually paid every week or every two weeks. However, clients pay every month or so. Without a cash reserve, the agency will run out of money quickly.
b) How do you fix this problem?
The approach you take to solve your cash flow problems depends on your specific situation. Some cash flow problems can be solved by improving your business practices. Other problems require financing to help cover payroll. We cover these options in the following sections.
2. Simple tips to improve your business
Many new staffing agencies have cash flow problems because they don’t have an effective collections system. Unfortunately, the importance of consistent invoice collections tends to be undervalued until cash is tight. However, once cash is tight, it’s too late. These companies can usually get substantial improvements from simple changes to their operations.
a) Improve collections
The typical client list of most hospitality staffing agencies includes restaurants, hotels, clubs, and senior care facilities. These businesses also have tight cash flows, and some of these businesses are seasonal. Consequently, this situation often leads to slow payments.
A well-planned invoicing and collections system can help you improve cash flow. Additionally, checking your client’s business credit helps ensure you offer terms only to companies that have good credit.
Read “How to Collect Slow-Paying Invoices Effectively” to learn more.
b) Offer early payment discounts
Companies with good collection systems that still need clients to pay even sooner should consider offering early payment discounts. This incentive typically provides your client with a 2% discount if they pay in less than ten days. Otherwise, they pay the total value of the invoice on their usual terms.
This strategy is simple to set up and can be effective. Furthermore, clients like the discount because the savings drops straight to their bottom line. However, the strategy also has some drawbacks. For example, early payment discounts are optional. This creates some uncertainty because you never know if clients will pay early.
3. Improve cash flow with payroll financing
Payroll financing is a general term for financing solutions that leverage your accounts receivable to help you meet your payroll obligations. The most popular solution used by staffing companies is invoice factoring. It can provide good results for staffing agencies whose cash flow problems are due to slow-paying clients.
a) What is invoice factoring?
Invoice factoring improves your cash flow by financing slow-paying client invoices. It provides funds to cover payroll and other company expenses. When used strategically, a factoring plan can help you grow your business.
Most factoring companies finance transactions in two installments. The first installment is funded shortly after you submit the invoice to the factoring company. It is deposited directly into your account and covers 90% to 95% of the invoice’s value.
The remaining 5% to 10%, less the factoring fee, is deposited into your account once your customer settles the invoice. This payment concludes the transaction. Read “How Does Invoice Factoring Work?” to learn more.
4. Advantages of using factoring
Invoice factoring is common in the staffing industry, especially with companies that are growing quickly. This solution offers the following advantages.
a) Improves cash flow quickly
The most important advantage and the primary reason staffing agencies get factoring is that it improves cash flow quickly. It provides a stable financial platform they can use to grow the business.
b) Offer net-30 terms to clients
Factoring allows your agency to offer net-30 terms to clients while minimizing the cash flow concerns. You always have the option to factor the invoice.
Additionally, the factoring company can help you determine which clients should get terms. This guidance helps you avoid potential bad debt.
c) Grows with your business
Factoring lines are adaptive and grow with your business. The line’s limit can increase as long as you work with quality clients who are happy with your services.
d) Simple qualification
Factoring lines are intended for small businesses. Consequently, they have simple qualification criteria. Staffing agencies with a well-established business, a solid roster of clients, and unencumbered invoices should be able to qualify.
5. Do you qualify for payroll financing?
Qualifying for factoring is simpler than obtaining another solution. Factoring companies regularly finance staffing agencies and know how to underwrite them. The qualification process typically considers three things:
a) Do you have quality invoices?
Your invoices are the primary collateral backing the transaction. The finance company reviews your customer’s commercial credit profile to ensure they pay their invoices promptly. Also, note that factoring companies only finance invoices for work completed and accepted by the customer.
b) Are your invoices encumbered?
The factoring company can finance your invoices only if they are free of liens and encumbrances. Potential liens may come from other financing companies (e.g., loans or lines of credit), taxing authorities, or judgments.
c) Is your company set up correctly?
Your company must be appropriately set up and operated. Additionally, payroll taxes must be current, or you must have a payment plan with taxing authorities.
6. Stepping stone to other solutions
When used strategically, a factoring line can be a stepping stone to other financing products. Companies that outgrow their factoring lines may qualify for ledgered lines of credit or bank financing. These options typically offer more flexibility at a lower price.
Get a factoring quote
We are a leading factoring company and can provide you with a competitive quote. For more information, get an instant quote or call us toll-free at (877) 300 3258.