Tips for Staffing Companies: How to Increase Working Capital

By Jeff Wright, Senior Vice President, Hennessey Capital

As we continue to see signs of an economic recovery, the strength and duration of it remains uncertain. As a result, companies are reluctant to hire permanent employees. Instead, they are turning to temporary staffing companies to fill their needs. The staffing industry is beginning to see an increase in the level of activity as businesses ramp up production and level of service. This can create a cash flow problem for staffing companies that do not have adequate cash reserves. Employees must be paid weekly or bi-weekly but must wait 30-60 days to collect from their debtors. This causes a drain on cash especially when they are trying to grow their business. They may also lose out on the opportunity to bid on new contracts, due to cash constraints. Management can inject additional capital or they can secure funding from third party investors. The challenge with either of these options is that current ownership may have to sacrifice a level of control within their business to achieve the desired outcome.

An alternative for staffing companies that face this cash crunch is to seek business financing. Since the staffing company’s primary asset is the people they contract out, it does create an accounts receivable that can be leveraged to generate the working capital they need to pay its employees and operating expenses on time and take advantage of new opportunities. If traditional banking sources are not available, a factoring company can provide an alternative source of financing. Factoring is the sale of accounts receivable or invoices at a small discount to obtain immediate cash. This type of financing gives businesses the ability to ensure growth without diluting equity or incurring debt. While factors are concerned with the long term viability of the company, their primary focus is on the debtor strength, the debtor’s ability to pay the invoices being purchased and the character of the management team. While traditional funding sources, like banks, may focus on the staffing company’s past, factors look at future opportunity and growth opportunities. A factoring facility is easy to qualify for and can quickly create immediate working capital availability to meet cash needs. Factoring can be used to bridge the gap between the time the service is delivered and the time the invoice is paid and helps in managing the in-flow and out-flow of cash for staffing companies that want to capitalize on the prospects that lie ahead for their in-demand service.