Payroll funding for staffing firms is a form of invoice factoring built for staffing agencies: you sell your client invoices to a funding company and get most of the cash within a day or two, so you can pay your workers every week while your clients take 30 to 60 days to pay you. It’s the most common way growing staffing companies cover payroll, because the funding grows automatically as you place more workers.
Here is how staffing payroll funding works, what it costs, how to qualify, and the mistakes that get staffing firms in trouble.
Why staffing firms run short on payroll cash
A staffing agency pays its temporary workers weekly or biweekly, plus payroll taxes, workers’ comp and insurance. The client pays the agency on net-30, net-45 or net-60 terms. That gap means every new contract makes the cash crunch worse before it gets better. Win a contract for 50 workers and you could be carrying several weeks of payroll before the first client payment arrives. Profitable agencies run out of cash this way all the time.
How payroll funding works
- Your workers submit timesheets and your client approves them.
- You invoice the client and submit the invoice (and approved timesheets) to the funding company.
- The funder advances 85% to 95% of the invoice, often the same or next business day, in time to run payroll.
- Your client pays the funder on its normal terms.
- The funder releases the reserve to you, minus its fee.
Example: weekly invoices of $40,000 at a 90% advance give you $36,000 each week for payroll. With a 2% fee for 30 days, the cost on each invoice is about $800.
What staffing payroll funding costs
Staffing factoring rates typically run about 1% to 3.5% per 30 days, often lower than general factoring because staffing invoices are backed by approved timesheets and usually paid by creditworthy companies. Your rate depends on:
- Your monthly volume (higher volume, lower rate)
- Your clients’ credit and payment speed
- Whether you factor every invoice or pick and choose
- Recourse vs. non-recourse terms
- Contract length and minimums
Look past the rate at extra fees: setup, wire and ACH, credit checks, and early termination. Some staffing funders also offer back-office services such as payroll processing, tax filings and invoicing for an added fee. That can be useful for a new agency, but compare it to what you’d pay a payroll service on its own.
How to qualify
Payroll funding is easier to get than a bank loan because approval is based mostly on your clients, not just your own credit or time in business. Funders typically look for:
- Commercial or government clients with good payment histories
- Clean, client-approved timesheets and signed staffing agreements
- Current payroll taxes. This is the big one. Unpaid federal payroll taxes can give the IRS a claim that comes ahead of the funder, so most funders verify that your 941 deposits are current and many will monitor them going forward.
- Workers’ comp coverage in place for your workers
- No conflicting liens on your receivables (or a plan to pay them off)
New agencies can qualify, sometimes from the very first contract, as long as the client is creditworthy.
Mistakes that hurt staffing firms
Using payroll tax money to make payroll. It’s tempting when cash is tight, but falling behind on payroll taxes puts owners personally on the hook for the trust fund portion and can shut off your funding. Payroll funding exists so you never have to do this.
Stacking a merchant cash advance on top of factoring. An MCA takes daily or weekly payments out of your account whether your clients have paid you or not, and most MCAs file a lien that conflicts with your factoring agreement. Staffing firms that stack an MCA on top of factoring often end up in default with both. Read more in merchant cash advance vs. factoring.
Signing a long contract without reading the exit terms. If you outgrow your funder or qualify for a bank line, you want to be able to leave without a big termination fee.
Payroll funding vs. a line of credit
A bank or non-bank line of credit is usually cheaper once your agency has two or more years of financial statements and steady profits. Until then, payroll funding is often the only option that keeps up with your growth. Many agencies use payroll funding to grow and then move to a line of credit once they qualify. Our guide to funding payroll gaps quickly walks through the other short-term options.
Get payroll funding set up
Liberty Capital Group has arranged business funding since 2004, and we work with funders that specialize in staffing: light industrial, healthcare, IT, clerical and professional staffing, including new agencies. We’ll compare programs for you and show you the full cost before you sign. See our invoice factoring programs, or get a quote. Questions? Call (888) 511-6223.
FAQ
How fast can a staffing agency get funded?
Account setup usually takes a few business days. Once you’re set up, invoices are typically funded within 24 hours, in time for weekly payroll.
Can a brand-new staffing agency get payroll funding?
Yes. Funders focus on your clients’ credit, so a new agency with a creditworthy client can often qualify.
Will my clients know I’m using a funder?
Usually, yes: clients send payments to the funder’s account. In staffing this is routine and rarely an issue.