There are two instances when a temporary nurse staffing agency could encounter a bit of a cash flow crisis. The first is when the agency is just starting out, and the second is when it hits a period of rapid growth. To a bank looking at a loan application, neither situation is attractive. On the contrary, to some factors both of these situations might sound very appealing, and this article explains why.
When a nurse staffing business is just starting out, it lacks two vital attributes for a bank to consider it as a good loan candidate. First of all, a startup staffing company does not have any tangible assets with which to secure a loan. In fact, the company’s primary asset is its nurse staffing accounts receivables, which unfortunately is not concrete enough for a bank because those can disappear quickly and without notice. Banks look for assets that are more tangible such as real estate, machinery or equipment—something physical that they can place a lien on wherever it goes so that in the event of default, the bank can still lay claim to and liquidate that collateral.
On the other hand, there are some nurse staffing factoring firms that are willing and able to work with startup nurse staffing companies. Rather than loaning money, factors provide cash based on the quality and liquidity of a temporary nurse staffing agency’s assets, specifically their accounts receivable. In the event that a nurse staffing agency was to go out of business, a factor can continue to collect on invoices that were issued previous to their closing up shop.
The second area that could prevent a new nurse staffing agency from obtaining a business loan is that banks provide loans on the basis of a company’s historical financial performance rather than its potential for success. Temporary nurse staffing companies who are just starting out have no financial history, which is viewed by a bank as just as risky as having a bad one. Moreover, banks traditionally will not consider loaning money or extending credit to companies who have been in business for fewer than three years because of the high failure rate for new businesses.
Once again, some nurse staffing factoring companies have a different approach to funding new businesses and are not so easily swayed by the fact that they are just opening their doors. For starters, factors consider the quality of a nurse staffing company’s accounts (the credit-worthiness of their customers and the validity of their invoices) which allow them to provide funding even when the company is new. Nurse staffing factoring firms see a different picture when investigating the credit-worthiness of their clients’ customers. As long as the client is staffing nurses in good paying medical facilities, and the factor is comfortable that they will get paid for the invoices that they buy, the actual agency’s credit becomes a minute detail in the grand scheme of things.
As I said previously, another time when nurse staffing agencies find themselves in need of cash is during a rapid growth period. For example, a temporary staffing company may have landed a contract with the area’s biggest hospital, and they need to hire and staff an additional 20 nurses immediately. The agency might have enough money to recruit nurses to fill the demand, but it might not have enough readily available cash to pay their nurses once they have completed their shifts. This situation is quite common in the nurse staffing world because business owners are expected to invoice and make payroll on a weekly basis while the medical facilities they staff regularly can take up to three months to pay for those shifts.
Now let’s analyze this situation from a banker’s perspective. Banks consider a company’s ability to repay a loan based on its historic earnings cash flow. Unfortunately for our growing temporary staffing company, its previous income and cash flow is much smaller in comparison to its increasing need for financing. Sometimes a nurse staffing company’s previous year’s income is enough to secure a bank loan, that is to say, if the staffing agency wanted to stay at its same operating size. More often than not, a staffing company goes to a bank looking for a larger loan than what last year’s earnings could justify because they intend to use the loan to double or triple last year’s revenues. Unfortunately, a bank wouldn’t feel comfortable loaning money to a company based solely on its potential to grow. Once again, banks look at the agency’s profitable operating history to justify lending. So the bank lending process eventually turns into a never-ending cycle—the nurse staffing company needs money to grow, but the bank needs to see a history of growth to give out money.
Enter a nurse staffing factor. Though a factor will look into a growing nurse staffing business’s operating history, it’s not a deal killer if the company doesn’t have a track record of high earnings because a factor is generally more concerned with the future of the business. A good rule of thumb to remember: banks look to a company’s past to justify approving a loan, while factors look at a company’s future growth potential to justify advancing cash on their invoices. Going back to our example, the fact that the nurse staffing agency just signed a contract with one of the biggest and fastest paying hospitals in the area means nothing to a bank, but it is great news for a nurse staffing factoring firm.
I hope that the factoring information that I’ve shared with you in this article have helped you realize how hard it is for a new or growing nurse staffing company to be approved for a bank loan. Fortunately, there is another good alternative business financing option—nurse staffing invoice factoring. Selling their invoices to a nurse staffing factoring firm is a much more lucrative option for agencies who are just opening their doors or who are going through a period of rapid growth.