A staffing factor is company that specializes in providing staffing agency funding. They offer an advance based on their customer’s accounts receivable, so that staffing agencies can cover urgent expenses such as payroll. Here’s one possible scenario in which factoring really helped a staffing agency grow.
XYZ Security Company
XYZ Security Company offers security guards for malls and for gated communities. The company often has cash flow problems, because their customers tend to pay only after 60 days. That means they have to cover payroll for 8 weeks before they get paid.
The company considered getting a bank loan, but they were rejected because they don’t have enough assets to use as collateral. So the company always strives to keep some money in the bank so that they can cover the costs of new clients.
XYZ Company’s reputation has grown over the last decade, and now they have been approached for a lucrative contract. A property company has asked that XYZ provide security guards for their 25 gated communities. However, the property company only pays invoices in 75 days. That means the XYZ Company has to cover the payroll for 11 weeks before they get their first payment.
Each community has two gates, which means they need 50 guards at any given time. Since the guards have to be there constantly, XYZ had to provide three shifts of 8 hours each per day, and that means every day will require 150 guards total. Each security guard earns $600 a week on average, so every week the XYZ Company spends $90,000 on payroll. But the contract says that each week the security company gets paid $117,000, which represents a 30% profit margin.
The Factoring Solution
XYZ Company only has $100,000 in its bank account, but they need $90,000 for 11 weeks before they get any money from the property company. So without a loan, they couldn’t accept the contract.
But here’s where factoring helped. A typical factoring company charges 1% for every 10-day cash advance, and provides 80% of the value of the invoice as an advance. That means XYZ gets an advance of $93,600 for each week, which is more than enough to cover the weekly payroll for the guards.
After 75 days, the factor is paid in full by the property company for the first week of the security job. The factoring company then subtracts 7.5% of the value of the invoice. That’s $8,775 and so the factor sends back $14,625 to XYZ.
Thus, XYZ still earns a profit of $18,225 a week on the contract! That’s a yearly profit of $947,700. Can you imagine that XYZ almost said “no” to almost a million dollars a year?
That’s how factoring companies can really help staffing agencies. Unlike other types of businesses, staffing agencies must meet its considerable payroll responsibilities. Now thanks to a staffing factor, XYZ Company was able to meet payroll and still earn substantial profits. The 7.5% in fees was truly worth it!