Why is payroll factoring better than a small business credit card?

creditcardWhen your staffing firm has a cash flow issue, it may seem like an easy fix to reach for the plastic.

 

However, there are downsides to using small business credit cards.

 

  • Credit cards require a great deal of personal management to stay abreast of changing terms, interest rates and even perks.

 

  • Your business credit card can affect your personal credit score.

 

  • Credit cards often have high annual fees.

 

  • Some cards require you to pay your full balance each month to receive rewards.

 

  • If you go over your limit or have a missed or late payment, you face high fees.

 

Payroll factoring, on the other hand, is a more flexible option. It does not require lengthy credit or financial reviews, and the application process is quick and easy.

 

With payroll factoring, you sell your accounts receivable invoices to the factor in exchange for immediate cash. Your clients then pay the factor directly.

 

Payroll factors are likely to overadvance because they understand the staffing industry, while with a business credit card, if you go over your limit, you’ll be penalized with high fees.

 

In addition, payroll factoring includes one low rate, expressed in your contract, that doesn’t change without your agreement.

 

For more information on payroll factoring and how it can benefit your staffing firm, visit www.tempay.com.

What is my role in the payroll factoring process?

meselfThe beauty of payroll factoring is that it allows you to focus on your business while the factor handles the details.

 

The bulk of your efforts are required at the beginning of the factoring process, when you fill out an application form and discuss rates, terms and conditions with the factor.

 

Once you sign an agreement, your factor will set up procedures for funding your payroll. You will need to provide names, Social Security numbers and other employee information, as well as a list of your accounts receivable invoices and copies of the invoices and timesheets.

 

As new employees are hired, current ones leave the company or pay grades change, you’ll need to update your factor. You also need to send additional accounts receivable invoices as you generate them.

 

If you are a full-service client, you will need to regularly provide the factor with additional information, such as tax documents or delinquent accounts.

 

Communication is key. If you have questions, problems or concerns, speak honestly with your factor. Developing a strong relationship will ensure your payroll factoring process operates smoothly.

 

And don’t forget to review your options annually. Banks and other payroll companies often offer aggressive rates to hook new business, so if you find a lower rate, let your factor know. It will most likely beat the price to keep you as a client.

Questions to ask before committing to payroll factoring

shutterstock_questionguyPayroll factoring, in which staffing firms sell their accounts receivable invoices to a factor to gain cash up front to pay their employees, vendors and bills, is a popular form of staffing finance. However, it is not right for everyone.

 

Ask yourself these three questions to determine if payroll factoring is right for your business.

 

  • Do I have a cash flow gap? Many staffing firms pay their temporary employees and vendors weekly but don’t receive client payment for 30 to 90 days, creating a cash flow gap. If this gap affects your ability to pay your bills, fund your payroll or expand your business, and if you’re dipping into your personal assets, making late payments or paying interest on loans, credit cards or lines of credit, payroll factoring may be right for you. As a bonus, payroll factoring provides you with money you can use to pay your vendors earlier, taking advantage of potential discounts and saving you additional money.

 

  • Do I need help with administrative tasks? Payroll factors often offer full-service options in addition to basic payroll factoring. This means the factor will file and pay your company’s payroll taxes, invoice your customers, pay your employees and handle collections. This allows you to focus on your business and save money on wages, taxes and benefits you would provide to someone performing an administrative function in house.

 

  • Do I worry about customer creditworthiness? If you’ve ever lost a customer because it filed for bankruptcy or failed to pay for your services, you know the importance of evaluating customer credit. Many factors monitor the creditworthiness of your customers and prospects, alerting you to potential payment problems and risks. TemPay, for example, monitors customer creditworthiness 24/7 at no extra charge through its Dun & Bradstreet database and suggests alternative payment options for risky customers.

 

If you answered yes to one or more of these questions, payroll factoring may be for you. Contact TemPay at (866) 683-6729 to see how we can help.

Full-service versus money-only payroll factoring

Most factors offer two payroll factoring options: money only and full service.

 

Money-only factoring is strict payroll funding without any additional services. With full-service factoring, the factor provides administrative support, including filing payroll taxes, sending invoices, paying temporary employees and making collections.

 

Both options have their merits, and your choice depends on your staffing firm’s unique needs. However, to help with your decision, here are the pros and cons of each option.

 

Full service

Pros

  • Your factor handles administrative details so you have more time to focus on your business.
  • You receive extensive reports of the administrative and financial activity of your staffing firm.
  • Your factor operates as a virtually invisible partner. Your firm’s name will still appear on all checks and invoices.

 

Cons

  • You are removed from the administrative and financial processes and may not be up to date on issues.
  • You pay for the service, taking money away from your business.
  • You don’t have as many touch points with clients, eliminating some rapport-building opportunities.

 

Money only

Pros

  • You receive the money your staffing firm needs to cover your cash flow essentials.
  • You save money by handling administrative functions in house.
  • You maintain control by processing your own paychecks, printing your own invoices and filing and paying your own payroll taxes.

 

Cons

  • You need to handle administrative support in house, taking time and resources away from other functions.
  • You must remain up to date on your own payroll taxes to file and pay them correctly.
  • You don’t have as many touch points with your factor, eliminating some rapport-building opportunities.

Payroll factoring terminology: Important words to know

Payroll factoring is a relatively simple process. However, you may run into some terms that leave you scratching your head.

 

We’ve defined the most commonly used words and phrases to take you from payroll factoring zero to hero and help you decide on the best option for your staffing firm.

 

  • Accounts receivable – Money customers owe your staffing firm in exchange for goods or services

 

  • Advance rate – How much of your invoice’s total your factor gives you up front

 

  • Debtor – Your customer

 

  • Due factor – The amount owed to the factor

 

  • Due client – The amount owed to you after the invoice is paid in full, minus any fees. Also called reserve release.

 

  • Full service – Payroll factoring in conjunction with administrative functions such as filing payroll taxes, sending invoices and collections

 

  • Money only – Payroll funding without administrative support

 

  • Nonrecourse – The factor assumes the risk of bad debt and is out the money it is unable to collect

 

  • Payroll factoring – A type of staffing agency finance in which your staffing firm sells its accounts receivable invoices for a fee to the factor and gains cash up front to pay your employees and vendors. Also known as invoice factoring and accounts receivable factoring.

 

  • Recourse – You, the staffing firm, assume the risk and losses for unpaid invoices. You must buy back invoices that customers don’t pay within a fixed amount of time.

Managing risk in the staffing industry

With any business comes risk, and the staffing industry, in particular, faces unique risks in terms of workers’ compensation insurance, cash flow problems and contract/agreement needs.

 

Mismanaging or ignoring these risks can land your staffing firm in serious trouble and they need to be occasionally revisited to ensure your firm minimizes its risks and maximizes its potential.

 

Workers’ comp

 

One of the largest staffing firm expenses is workers’ compensation, and it is a necessity you should take seriously.

 

Workers’ comp protects you in the event of an employee injury by providing wages and medical benefits in exchange for the right to sue for negligence.

 

In most states, temporary employees are considered employees of the staffing firm, not of the client, meaning you are responsible for injuries and disability costs, which vary depending on your industry and its specific risks.

 

Most staffing firms receive workers’ comp insurance through an insurance company; however, some states, such as Ohio, handle it at the state level. To determine your state’s rules and regulations, visit workerscompensation.com.

 

Without workers’ comp coverage, you are at risk in the event of an employee injury, and you could face penalties from your state for failure to maintain coverage.

 

To reduce work-related injuries, screen employees through drug testing, background checks and prior injury history. Also, ensure that employees are properly trained and provided with the proper safety equipment.

 

Cash flow

 

Most staffing firms face the same cash flow problem: You must pay your temporary employees and vendors weekly, while waiting 30, 45, 60 or even 90 days for client payment.

 

This is especially important to keep in mind when starting a staffing agency or preparing for growth, as you can easily find yourself in a situation in which you need to shell out money you don’t have.

 

To combat this issue, many staffing firms turn to payroll factoring, in which you sell your accounts receivable invoices to a factor for a fee and receive cash up front to pay employees, vendors or other bills.

 

Establish clear payment terms with your clients and be proactive when a client doesn’t pay. Creating a cash flow plan that outlines your weekly and monthly cash flow helps you determine your staffing company’s cash flow trends and plan for them accordingly.

 

Contracts and agreements

 

A paper trail is important, especially in an industry in which you are working with multiple clients and vendors.

 

For client contracts, include payment details and due dates, as well as a confidentiality clause, in which you agree not to disclose trade practices your temporary employees may learn while on the job. Insert a reciprocating confidentiality clause in which your client agrees not to disclose your trade practices, as well.

 

A contingency clause is also essential, as it ensures that your client won’t hire your temporary employees within a certain time unless you receive an additional fee.

 

You may also want to consider an exclusivity clause, in which the client agrees to use only your staffing firm as its temporary employment provider.

 

For in-house employees, noncompete agreements are common. These prevent your employees from both starting a competing business and working for a competitor within a certain time and/or geographic area.

 

Non-compete agreements can be tricky, as enforcement depends on specific court interpretation, so they should be as narrow as possible. Consult legal counsel to ensure your agreement will hold up in court.

Top 5 reasons to consider payroll factoring

Payroll factoring is a favored form of staffing agency finance, and it’s easy to see why.

 

With payroll factoring, staffing agencies sell their accounts receivable invoices for a fee to obtain immediate cash. Your clients then pay the factor directly.

 

Still not convinced? Here are the top five reasons you should consider payroll factoring.

 

1. Payroll factoring provides your staffing firm with instant cash to operate and grow your business, which is critical in an industry in which you often need to pay employees and vendors weekly, while waiting 30, 60 or even 90 days for client payment.

 

2. Payroll factoring is available to staffing firms of all sizes and in all stages. It is particularly effective for those looking to start a staffing agency and who have no collateral or credit history.

 

3. Payroll factors have a much quicker and easier application process than traditional lenders. Your payroll factoring application can be approved within 24 hours for next-day funding. While factors do conduct a credit check, traditional lenders often require good credit and only provide funding after a lengthy business and financial review.

 

4. Payroll factors that specialize in staffing firms better understand how your business operates and what makes it unique. They are more lenient than traditional lenders and willing to make exceptions for circumstances such as overadvances or unforeseen cash flow needs.

 

5. Payroll factoring is available for firms in any industry, including:

  • Administrative
  • Clerical
  • Construction
  • Health care
  • Information technology
  • Legal
  • Light industrial

6 questions to ask your payroll factor

Not all payroll factors are the same. Some operate only within specific industries, and the rate advance can vary.

 

When reviewing payroll factoring prospects, ask these six questions to gain valuable information to make an educated decision.

 

1. How can I be assured my company will receive funds? Your staffing firm needs steady cash flow, so you need to know your funds will arrive in full and on time.

 

2. How soon do I need to notify you of payroll changes? When you begin payroll factoring, you provide employee names, Social Security numbers and other information so your factor can seamlessly fund your payroll. However, as new employees are hired and others depart, you need to update your factor to avoid payroll hiccups.

 

3. What kind of relationship do you have with clients? Your factor should be willing to have ongoing, open communication and be reachable if you have questions, problems or concerns.

 

4. Do you provide recourse or nonrecourse factoring? With recourse factoring, the staffing firm assumes the risk and losses for unpaid invoices. As a result, you must buy back invoices your customers don’t pay in a fixed amount of time. This is the most common form of factoring. With nonrecourse factoring, the factor assumes the risk of bad debt and is out the money it is unable to collect. This is safer for the staffing firm but risker for the factor and is therefore not as common.

 

5. How much do you advance? Many factors advance 75 to 80 percent of an invoice’s total and keep the rest as their fee. TemPay advances 90 percent or more, among the highest rates in the industry.

 

6. Do you specialize in my industry? Choosing a payroll factor that specializes in staffing, and even further, to your niche within the industry, ensures you will receive the proper attention and understanding and paves the way for smoother communication.

Managing risk when selecting a staffing niche

Payroll factoring within a niche is a great way to provide more personalized and tailored staffing services with a deeper understanding of a specific industry. However, there are some things to keep in mind when selecting your niche.

 

“Regardless of the niche, the greatest overriding concern is the risk involved,” TemPay Chief Operating Officer Marc Mellman says. “There are certain industries generally known to be higher risk than others, and there is growing risk in every industry in staffing today.”

 

  • Transportation is one niche known for its high risk. Truck maintenance and damages, delayed schedules and fluctuating rates make the industry a tough sell, although those with the experience and know-how may find it lucrative.

 

  • Another such industry is agriculture. Weather and climate, food storage and transportation problems make this a risky venture, although again, those with the skills to navigate the industry can achieve great success.

 

“There are certain niches TemPay doesn’t do business in because they are riskier than others,” Mellman says. “When selecting a niche, staffing firms should keep in mind that it may be harder to find funding and support for these industries.”

 

Staffing firms also face the risk of fraud, which is harder to identify in a niche with which you are unfamiliar.

 

“The risk is that the client may be unscrupulous, and you will lose time and money,” Mellman says. “This is a big problem in the staffing industry in general, but it is more common in niches that staffing firms do not understand.”

 

So what can you do to protect yourself and your agency?

 

  • Thoroughly investigate potential clients. In addition to a routine Internet search, which can unveil unhappy employees, customers and peers, and relevant news articles, examine clients’ credit rating and debt history to gauge any possible issues.

 

  • Routinely compare the client’s timesheets, invoices and billable hours against your numbers.

 

“It can takes weeks or months to figure out a client is committing fraud, especially in a niche with which you are unfamiliar,” Mellman says. “Make sure you understand your risks and continually monitor your accounts.”

Payroll factoring in niche staffing

When factoring to different staffing niches, the process is essentially the same, regardless of the niche, when it comes to Uniform Commercial Code filing and notification, verification of invoices and collection practices.

 

However, there are some differences in payment terms depending on the industry, says Brian Keuper, senior vice president and client relations manager at TemPay. Most staffing niches have a standard net 30-day term, but some, such as medical staffing companies, extend the terms to net 45- or net 60-day terms.

 

Staffing firms of all sizes and in all stages of their lifecycle can receive payroll factoring, whether you are starting your own staffing agency or established in the field, and regardless of your number of clients.

 

Payroll factoring is available for firms in any industry, including:

 

  • Light industrial
  • Administrative
  • Information technology
  • Construction
  • Health care
  • Legal
  • Clerical and many others

 

When selecting a factor, choose one that specializes in staffing firms. These factors will better understand how your business operates and what its unique needs are, which is critical when temporary employees are often paid weekly but clients don’t pay for 30, 45 or even 60 days, creating a cash flow gap.

 

If you need quick funding to cover your workers’ compensation or office lease payments one month, or a larger-than-usual advance to open a new branch, a factor specializing in staffing will understand your situation and be more capable of assisting you.

 

“To be honest, all credit and background checks of account debtors are done in the same process in all niches,” Keuper says. “Looking for creditworthy account debtors is universal and not dependent upon a certain niche of any industry. At TemPay, we just ensure that we are advancing money to clients that have creditworthy customers who will have the resources to pay within a timely manner.”