Offering contract staffing services is a great way to diversify your recruitment process and offerings, boost your marketability, and increase your profits. However, you need to run payroll for your contract workers, and that normally happens before your clients pay you. As a result, you are responsible for funding payroll.
When cash flow is tight, payroll funding for staffing companies and recruiting firms can be difficult to manage. While you pay your contractors weekly or biweekly, it could be 30 to 90 days before your clients pay you. Having one contractor alone can result in you doling out several thousand dollars for payroll before you see any money from your client. And if you have multiple contractors? Payroll funding can add up quickly.
Don’t let the cost of funding the payroll keep you from adding what could be a very lucrative line of business. You have options when it comes to payroll funding for recruiting and staffing agencies.
4 Options for payroll funding for staffing companies
Funding payroll for contract workers doesn’t just mean paying their salaries (wages). You need to have enough money to pay for things like workers’ compensation insurance, unemployment taxes, and other employer tax liabilities.
The idea of payroll funding might be stressful at first. But, making ends meet until your client provides payment doesn’t have to be a struggle.
Here are four staffing agency payroll funding ideas to get you started.
1. Self-funding
You might consider using your own money for payroll funding. By self-funding, you don’t incur fees or debt, which will save you from headaches later on.
To self-fund the payroll you should probably set a budget. You may set aside some of your profits from contract staffing or your recruited placements. But, payroll funding for startup staffing companies might be a little more difficult.
Unless you can draw from your existing direct hire business, a large savings account, or another viable source of income, you may not be able to float the payroll until your contract staffing business becomes more profitable. Instead, consider one of the following options.
2. Line of credit
If you can’t afford to self-fund the payroll you can apply for a line of credit from the bank. Unlike a loan, a line of credit is a revolving account, meaning you can use it for future payroll funding, too. But you need to remember that there are fees.
With a line of credit, you have a certain amount that you can borrow up to. You can borrow from it to fund payroll costs, and you can pay off the balance when your client pays you.
Asking for a line of credit can be a viable option for large, established recruiting firms, but smaller firms may find it difficult to get funds from banks. And, obtaining a line of credit that is either too large or too small can result in unnecessary fees. You might need to offer some form of collateral to obtain a line of credit, which can put your personal and professional assets at risk if your clients don’t pay.
3. Payroll funding/factoring companies
Another contract staffing funding option is to use invoice factoring. A payroll funding or factoring company offers asset financing. The factoring company purchases client invoices due within 90 days and gives you immediate cash.
Funding companies for staffing agencies pay you the invoice in two installments. They generally pay part of the invoice upfront and hold a percentage as a deposit until the client pays. And, you lose a percentage of the invoice to factoring fees.
Although the approval process usually moves more quickly than bank funding, you should be aware that the invoice factoring company considers your clients’ credit. If you are approved, you and the factoring company sign an agreement.
Once you and the factoring company sign the agreement, you receive an advance. The advance amount varies based on the company. For example, you might receive 80% of the invoice amount.
You might decide to let your clients know that you have factored your invoices. And, your clients may pay the factoring company directly. When your client pays their invoice, you will receive the reserve amount, minus the factoring fees you owe to the company.
Factoring fees are a percentage of the total invoice. Fees may be based on factors like your client’s creditworthiness and the length of time it takes them to pay. And, some companies may charge additional fees, like the upfront cost of opening an account, credit check fees, or transaction fees.
4. Employer of Record (EOR)
While the previous options address the payroll funding issue, they don’t relieve you of your administrative payroll duties, such as employee on-boarding, timesheet collection, calculating pay and taxes, setting up direct deposit, and handling tax withholdings and filings.
In addition to payroll funding, an EOR provider will take on your payroll processing tasks. And, the back-office becomes the legal employer of your contractors. They handle all the other employment responsibilities, including contract negotiations, workers’ compensation, unemployment insurance, benefits administration, background checks, invoicing and collections, and more.
Using a an EOR, also known as a contract staffing back-office, like FoxHire, is an option that goes beyond your need for payroll funding. And, you can still earn a significant profit for every hour your contractor works.
When you outsource your payroll funding to a back-office provider, it not only eliminates the funding problem, but it will save you time so you can focus on what you do best… recruiting and making placements!
