While the contractors expect to be paid weekly or at least every other week, it can take up to 90 days for a client to pay you for that contractor’s services. That means you may pay your contractors several times before you see even one dollar from the client. You could have several thousand dollars outstanding at any one time for just one contractor. This is compounded by the number of contract placements you have.
Fortunately, there are several options when it comes to handling the payroll funding aspect of your contract staffing business:
Self-funding. If you have a thriving direct hire business, a large savings account, or another source of income, you may be able to float the payroll until your staffing business becomes profitable. This of course is the ideal scenario because there are no fees and no debt. However, many recruiting firms do not have the resources to self-fund.
Line of credit. One obvious choice is to go to your bank and ask for a line of credit. The problem is that getting funds from banks has become increasingly difficult since the recession. It can also be hard to determine how large of a line you will need. If your line is too small, you will have to go through the approval process again and pay the associated fees. If you obtain a credit line that is too large, you will pay fees on the unused portion. For those reasons, Employment Marketplace, a provider of staffing industry news, suggests that the line of credit option is best for large, established firms, but not so great for start-ups or rapidly growing firms. Also, keep in mind that banks usually like to lend against hard assets, such as property, vehicles, etc., so you could be putting your house or business on the line if a client doesn’t pay.
Payroll funding/factoring companies. Unlike banks, funding and factoring companies usually lend against your accounts receivables rather than your hard assets. A typical scenario is that they will purchase the invoice and then take responsibility for collecting on that invoice. They will usually take a percentage of the invoice and may hold a percentage as a deposit until the client pays, according to Staffing Entrepreneur. The upside is that the approval process is usually quicker. Another difference is that the vendor will often look at the credit of your clients rather than of your firm. While this may be good if you are a small firm, these vendors tend to be very picky, so you may find yourself turning down business you would like to take.
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The biggest thing with these companies is that they vary in how they operate and what services they offer, so be sure to determine your needs upfront and select a vendor that meets those needs. For instance, do they handle the collections? Will they process the payroll? What about tax deposits, filings, reconciliations, etc.?
Contract staffing back-office. The options above are all viable ways to provide needed cash flow, but they don’t address the other challenges of contract staffing. Unless you find a funder who will also process payroll, you will be stuck with all of the administrative tasks that come with payroll, including timesheet collection, calculating pay and taxes, direct deposit, and tax withholdings and filings. A contract staffing back-office provider handles the funding AND the processing. Plus they become the employer of record for your contractors, which means they handle all the other employment tasks, too. These include contract negotiations, workers’ compensation, unemployment, benefits administration, background checks, and more. They also handle the invoicing and collections, and they take on all the employment liability.
If you decide to seek outside help for your payroll funding, be sure you select a reliable and reputable entity. Just as they will conduct their due diligence before taking on your business, you should check them out as well. Your reputation with your clients and contractors depends on it!