Cash-flow fluctuations occur in every business. However, these income changes do not always present problems. When a company has more money coming in than going out, it can easily cover its liabilities. A cash-flow deficit, on the other hand, could cause issues.
A cash-flow deficit could be due to an unexpected lull in business, a client or customer not paying their invoices promptly, or when you are starting or expanding your business and lack the cash reserves to cover your costs during temporary downturns.
A deficit could affect daily operations. For example, a hospital may be late paying invoices from a nursing staffing company. Without this money coming in, the staffing company will not have cash on hand to pay employees.
For staffing companies, workers are essential. Therefore, not paying employees on time is not a viable option. What can you do when faced with this dilemma?
Ideally, you would be able to build up cash reserves to cover payroll expenses. However, for many companies, especially those just starting, this is not a practical solution. Improving cash flow takes time.
A more realistic strategy is to have loans or credit sources ready in case such problems arise. Another option is to hand the invoices over to a factoring company in exchange for cash to meet payroll needs.
Here is a closer look at six of the most practical payroll funding options for staffing companies.
Self-funding a payroll is when you use income from a business or money from a savings account to pay employees’ salaries. This option is cost-effective because you do not incur any extra fees or interest charges.
The drawback of self-funding is that it is not always a viable option. Established companies may have positive cash flow to cover payroll costs. However, startups typically do not have enough consistent revenue to self-fund. Also, companies that self-fund their payroll typically have cash reserves to help overcome income fluctuations. A startup usually does not have this luxury because all the funds are tied up in building the business.
If you have a new staffing company, you will likely need to rely on other employee payment methods. However, after you start achieving consistent profits, self-funding could be your best option.
Bank Loans and Lines of Credit
Bank loans and lines of credit provide funding for payroll if you cannot cover it consistently with income or another self-funding source.
A loan provides one lump sum of money, which you can use to pay employees once or save to cover multiple pay periods. A line of credit, on the other hand, is a revolving account that you can borrow from and pay back repeatedly. Lines of credit offer more flexibility, while loans will require you to plan ahead and calculate the amount you will need to cover payroll costs.
Once your business is established, you can apply at a bank or credit union for a loan or line of credit. The lender will check your credit history and collect information about your business to help them with the approval decision. You can apply for a business loan to cover payroll, but many businesses apply for general loans or lines of credit that they can use for payroll or other purposes, as needed.
The primary drawback of a loan or line of credit is that you will have to make minimum payments each month, and you will have to pay interest on the money you borrow. Therefore, the cost of using a loan or line of credit for payroll is more than the cost of self-funding. However, if you cannot cover payroll with your income, loans and lines of credit are both readily available and flexible options.
Loans From Family and Friends
Entrepreneurs sometimes get financial help from family and friends when launching a startup. These informal investments can help cover payroll costs if you have an employee-based business like a staffing company.
There are two advantages to getting a loan or investment from a family member or friend. First, you do not have to undergo a rigorous application process at a bank. Second, a person close to you is likely to provide better terms than a third-party lender.
There are two potential drawbacks to this approach. First, if you fail to repay the loan, there could be tension with the family member or friend, which could make gatherings or other social occasions stressful. Also, a family member may use their investment as a way to become involved in your business and ask to be involved in decisions or provide unsolicited advice and unneeded pressure.
Getting a loan from a family member or friend for payroll expenses could be a good option if you make the terms of the loan very clear and ensure that the lender understands the risks associated with helping fund a startup.
Payroll Funding/Factoring Companies
Payroll funding companies provide an alternative to a loan or line of credit when you cannot meet payroll needs. Also known as payroll factoring, this process involves selling your outstanding invoices to a company. They pay you the cost of the invoice minus a fee, which is typically a percentage of the overall value of the invoice.
Payroll factoring can be especially useful for staffing companies. For example, employees of a healthcare staffing agency may expect to get paid weekly or bi-weekly. However, the healthcare facilities where they work may only pay invoices monthly. This creates a gap in cash flow, which can be made worse if the client is late paying their bills. By working with a factoring service, you can ensure that payroll is disbursed on time.
Your staffing company can also use factoring to deal with unexpected cash-flow fluctuations. You can use these services on an as-needed basis and rely on self-funding when cash flow allows.
The primary drawback is that factoring services charge a fee when they purchase your invoices, so they buy them for less than they are worth.
Discounting Your Existing Outstanding Invoices
Another option to deal with cash-flow problems is to offer a discount to clients who pay their invoices early. For example, you can offer a 5% discount to clients who pay bi-weekly or to those who pay before the due date. This can be an effective way to get payments on time so that you can better plan for payroll and other expenses.
The main drawback is that some clients may not take advantage of the discount. They may have their own cash-flow issues or may be unwilling to deviate from their budget plans. You will likely need other funding options if the discounts do not lead to quicker payments.
Contract Staffing Back-Office Provider
A staffing back-office provider offers payroll funding services and provides administrative services, as well. That means that the contractor will handle payroll and other administrative tasks, including managing benefits, conducting background checks for new hires, and calculating taxes.
This type of service frees you up to focus on building your staffing business rather than dealing with mundane administrative tasks. However, a back-office provider constitutes an extra expense. If you are trying to become profitable, having an extra contractor to pay each month can put a dent in your overall income.