Let me open by saying I rarely write about financing as I feel it’s a bit self-servicing. But this issue comes up a lot and cash-flow is important to the growth and operations of a staffing company. I think most non-bank lenders do a good job at providing capital for growth but are lacking on providing cash to financing operations. Whether your starting-up or majorly expanding, consider this when choosing financing options.
Advance Rate
This is the best example where non-bank financing options do well fueling growth but not operations. These lenders will typically advance 80% - 90% of the invoice up front, which will be enough to cover contract payroll – but depending on the staffing company’s mark-ups, not much more.
Example: Staffing Company ABC
Average Mark-Up 40% Average Invoice Turn 49 days
Weekly Contract (Sales) Billing: $200,000
Weekly Contract Payroll $143,000
Employer Taxes, Workers Comp $23,000
Total Cash Needed to Cover Wkly Payroll $166,000
Advance Rate Needed 83%
Most factors will provide the amount needed to cover payroll, etc. but what about the rest of the cash?
The remainder of the funds are paid after the invoice is collected. Average invoice turn is around 45 days in this industry which means a staffing company must cover 6 to 7 weeks of internal payroll, rent and other operating costs before seeing any additional money. In the above example, $217,000 is being held back ($31,000 X 7 weeks ) until the invoices are paid.
And even then, cash flow is uncertain because some invoicing will be paid even later.
The best solution is for to choose a lender that pays the reminder weekly – regardless of invoice payment.
The Hidden Cost
Base Fee, daily fees are fairly easy to compare when choosing a lender. But here is a cost that’s not easy to see.
When a lender only advances enough for payroll and burden, the base fee winds up being higher than advertised..
Example:
Base Fee: 2% of Billing in both scenarios
Advance of Payroll / Burden Only Advance of Payroll/Burden/Remainder
Weekly Billing $200,000 $200,000
Lending Fee $4,000 $4,000
Advance $166,000 $196,000
Effective Fee 2.41% ($4,000/$166,000 ) 2.04% ($4,000/$196,000)
Which would you rather pay? Lenders almost always charge on billing (not the amount advanced) so the less they advance, the higher the effective fee.
Industry Knowledge and Flexibility
This is just as important as the first two items. Staffing is a much different animal than other industries. Staffing usage varies and your lender needs to understand that receivables can grow very quickly for each customer. Some lenders have hard credit limits per customer and are not flexible enough to increase them. So, if a staffer has a client where placements blow-up and they have reached the credit limit, they may be out of luck.
For a good matrix comparison of different lenders to the staffing industry, click or copy this link.
https://www.staffersblog.com/post/staffing-firm-s-financing-options
So there you have it. A few tips to consider when choosing a lender. Please feel free to contact me to discuss further.
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