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Staffing companies face unique challenges when it comes to managing cash flow. They must pay their employees on time while waiting for their clients to pay their invoices. This can create cash flow gaps that can make it difficult for staffing companies to pay their bills and maintain their operations. One solution that staffing companies can use to bridge this cash flow gap is invoice factoring. Invoice factoring is a financial tool that allows companies to sell their outstanding invoices to a factoring company, which provides immediate cash in exchange. For staffing companies, this can provide the necessary funds to pay their employees and maintain their operations while they wait for their clients to pay their invoices.

How does invoice factoring work?

The process of invoice factoring for staffing companies is relatively simple. Here are the steps:

  1. The staffing company provides staffing services to their client and issues an invoice for those services.
  2. The staffing company sells the invoice to a factoring company at a discount.
  3. The factoring company provides the staffing company with a percentage of the invoice value, typically between 70% to 90%, upfront.
  4. The factoring company collects the payment from the staffing company’s client when the invoice is due.
  5. The factoring company returns the remaining percentage of the invoice value to the staffing company, minus their fee.
  6. The factoring fee is typically based on a percentage of the invoice value and can range from 1% to 5%. The exact fee will depend on various factors, such as the creditworthiness of the staffing company’s clients and the volume of invoices factored.

What if I want To Switch Factoring Companies?

As staffing firms grow over time, many of them decide they want to change factoring companies or move away from invoice factoring entirely. One thing to be aware of is that factoring companies do require a first-position lien to be put on the assets of the staffing firm (i.e. the collectable invoices) in order for them to provide capital in return. Thus, the lien on those assets must be fulfilled prior to switching factoring companies, so that the new factoring company may take the first-position lien.

How does invoice factoring differ from an Employer of Record?

Employer of Record (EOR) providers are often confused with factoring companies. However, EORs offer much more comprehensive services than factoring companies.

  1. EORs are the legal employer, not the staffing firm. This means that the contract staff work for the EOR, while the staffing firm focuses on sales and recruitment. 
  2. EORs handle the funding, so the staffing firm does not have to go get funding from a factoring company. This streamlines the process, and centralizes back office services to one vendor, the EOR.
  3. EORs handle the invoicing, not the staffing firm. So, the staffing firm does not have to chase their clients to pay invoices, the EOR company does that.
  4. EORs provide all the insurance, including benefits and workers comp. This is much more than a factoring company provides, which is only the cash flow for staffing firms.

In conclusion, invoice factoring is a valuable financial tool that staffing companies can use to manage their cash flow and maintain their operations. However, it may not be the complete solution that many staffing and recruiting firms need. Factoring does provide immediate cash and can help staffing companies to grow their business and achieve their goals. An EOR could also provide the same things, with added services on top. If you’re a staffing company facing cash flow challenges, consider exploring the benefits of invoice factoring and EORs to see which solution is right for you.

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