It’s not a secret that staffing companies nowadays have to find ways to deal with a new type of job market. For the most part though, things are looking up. Hiring is on the rise in many sectors, including oil and gas, education, IT, legal, and financial services. The recession and the job cuts are no longer apparent today and a lot of employers these days prefer to hire consultants through a staffing company.
But the business model for staffing companies usually results in a rather distressing cash flow situation. Staffing companies pay employees on a weekly basis. But business clients usually pay after 30 days, or even longer. Not having sufficient money for payroll can happen because of this.
This is where accounts receivable factoring comes to the rescue. The factor takes your accounts receivable and in return they advance you a huge chunk of the value of your AR. Then when the client pays the invoice in full, you get the rest of the money minus the fees charged by the factoring company.
There are several details about accounts receivable factoring rates you need to consider:
- The percentage of the advance. Some factors are known to advance as much as 90% of the value of the invoice, and sometimes they boast that the value of the advance is more than that. Usually, it’s in the 70% to 80% range. It all depends on a number of things, such as the invoice due date, the credit and trustworthiness of the customer and their tendency to pay on time, the value of the invoice, and whether the factor has a long standing business relationship with your company.
- The factoring cost. The accounts receivable factoring rates for staffing companies are usually expressed as a percentage of the value of the invoice, just as the interest rate is a percentage of a loan. It can be as low as 1%, or it can be two points over the prime rate. Again, all this depends on the factor and how you two negotiate your factoring agreement.
- The factoring fee. This is another fee, but usually this is a flat fee for every single factored invoice. This is why you may want to factor your larger invoices so that you keep the factoring fee to a minimum. A one-million dollar invoice is better than paying the factoring fees of a thousand accounts receivables worth a thousand dollars each.
- Just make sure though, that every fee you pay is specified in your agreement. And you need to make sure that the accounts receivable factoring rates for staffing companies are reasonable. Paying 20% for a loan is one thing. Paying 20% for money you get only a month in advance is another thing entirely. You have to calculate the APR so you understand how much the cash advance is costing your business. With this information, you can properly assess whether the advantages of accounts receivable factoring are worth what you pay for.