The funding of payroll through the sale of invoices (factoring) has been around since the post-WWII get-go of the staffing industry and has played a key role in the advancement of many great staffing companies. I remember my dad telling me about Design Service, a national technical staffing company he helped build up some 50 years ago. The owner – a polio-stricken man with great sales skills – would trudge down to Manhattan’s financial district each month with his stack of invoices and return with the funds necessary for payroll.
As staffing has become a mainstream industry, so has payroll funding. Many factors (funding companies) have entered the staffing market, increasing competition and providing many alternatives for a staffing company in need of funds. Working with a funding company that understands the staffing business can make for a more convenient relationship than working with a bank.
Better than a bank? Banks do offer a low rate of interest, local presence, and often serve as a new businesses introduction to the world of finance. But you quickly learn that they smack you with hidden fees and burdensome collateral requirements. If you read the fine print in most bank loan contracts, you’ll find that they can cancel the loan at any time or hit you with draconian penalties if in their sole estimation you fail to meet their requirements. Examples abound, but one good-sized staffing company in California recently spiraled into bankruptcy after a bank hastily pulled its loan.
Banks and IT: a bad marriage. Because they are heavily regulated, many fail to adapt to technology and use dated IT systems that prevent them from keeping up with ACH, pay-card, automated bank reconciliation, and other e-business solutions. If you join yourself at the hip with a bank via a loan, you may find yourself locked into a partner that can’t respond to the IT needs of a staffing business.
Here's another less well-known fact about banks: THEY DON'T LOAN MONEY. At best they make money you have more liquid. Those TV episodes where the banker agrees to give a scrappy, penniless start-up the funds to launch its venture are just that - TV episodes. FICTION. Jed Clampett and his travails with his unscrupulous banker on Beverly Hillbillies come closer to mirroring the real world.
Ok, you agree - after a quick look at all the charges on your last statement - banks do suck, but aren’t factors loan-sharks? Although every industry will have its less ethical players and loaning itself has negative connotations going back to ancient times, many factoring companies execute with the highest standards. Competition among them has raised all boats. Today, you can find factors offering rates competitive with that of a bank. Others differentiate with a high-percentage of initial funding and flexible remittance systems. Others perform stellar credit and collection services.
Yet others combine all this with back-office services like payroll and invoicing, thus offering an ideal platform for a staffing entrepreneur that wants to focus on sales and recruitment.