Ever
y once in a while as I speak with staffing company owners, I’ll meet someone who doesn’t use any source of outside payroll funding assistance.
While I respect anyone’s decision on how he or she chooses to run his or her business, I’m always curious as to why they choose this path. So I tend to ask a few questions and learn more about their business.
What I’ve found is interesting. The same types of comments keep coming up in my conversations. “It’s irresponsible.” “It’s not how I do business.” “I’ll lose control of my financial well being.”
In speaking with self-funded staffing company owners, I’ve found they tend to fall into three schools of thought.
1. They have an aversion to debt of any kind.
Some people have a higher tolerance for debt than others. Some are just downright averse to having any debt at all. While being debt-free is an admirable goal, it doesn’t take into account that not all debt is created equal. There is both good debt and bad debt.
Good debt covers your needs — like payroll — without putting your financial well being at risk. Bad debt may also cover your needs, but it typically comes with high interest rates, steep penalties for late payments and unforgiving terms. Credit card debt is the perfect example of bad debt. Credit cards are great for small, short-term expenditures, but they shouldn’t be used to finance your staffing business.
Having some good debt, such as a line of credit to fund your payroll, doesn’t have to put your business in jeopardy. In fact, it can limit your personal risk because it reduces the amount of personal funds a staffing company owner may need to invest in his or her company. It eliminates the need to raid personal savings, retirement funds or use personal credit cards. It also reduces the risk of having your personal credit rating impacted by late payments or other activities that could negatively affect your credit score.
Also, when you have limited personal funds tied up with your business, you make it easier to have an exit strategy should you decide to retire or sell your staffing company. If you have a large number of personal funds invested, it may not be the ideal market to recoup your total investment.
The housing market is a perfect example of this. If someone bought a home right before the bubble burst, he or she is unlikely to recoup their full investment if they tried to sell their home in this depressed housing market.
When you work with a funding provider such as an asset based lender, you shouldn’t owe more than the value of your receivables. So, if you choose to sell your staffing company, your payroll funding partner would have any outstanding receivables paid either from your customers, from the buyer or from the buyer’s funding provider. You wouldn’t have your personal funds tied up in the transaction.
2. They have a misunderstanding of the funding options available to them, and the value they can provide.
There are several funding options for staffing companies, all of whom can offer competitive rates. However, not all offer the same resources, flexibility or opportunities for growth.
• Bank line of credit — With credit still tight, a bank line of credit is often only a good option if you already have money. Unfortunately, if you’re a staffing company looking to grow, working with a bank line of credit can be a challenge. Traditional banks typically don’t understand the unique demands of the staffing industry. They are generally not supportive of new customers that may require you to double your credit limit. Also, banks don’t have the depth of resources to help you with other areas of your business such as evaluating the credit worthiness of a new customer or understanding how new laws or tax codes may impact your business.
• Factoring companies — With a factoring company, they take ownership of your receivables. This is not a loan, but an actual purchase of the financial asset. This can often leave you with a disconnect between you and your customers if they use heavy-handed collection tactics. Factors may also try to alleviate their risk by controlling with whom you do business. The factor will typically fund based on each customer’s risk, not the total portfolio risk. This can inhibit your opportunities for growth with a particular customer.
• Asset based lenders — With asset based lenders, you still own your receivables. It’s a revolving line of credit that fluctuates based on your accounts receivables balance. It easily allows for larger limits when your A/R balance necessitates increases. It is usually designed for the same purpose of a normal business line of credit: to allow a company to bridge the gap between the time of payments and expenses. Asset based lenders who work exclusively with the staffing industry often have a wealth of resources available to help you with other aspects of your staffing company as well.
3. They had a bad experience with a line of credit or funding provider in the past.
Just like not all debt is created equal, not all funding providers are created equal, either. It’s important when entering any funding relationship to understand the complete terms and conditions outlined in the contract.
It’s more than just an APR. You have to understand what is tied to that rate. When does the rate increase? What other fees might you incur during the course of normal business operations? How might these additional fees impact your bottom line?
A good payroll funding partner will be upfront about all these costs, as well as the services associated with your agreement. They should have an arsenal of strong, expert resources available to you. They should know the staffing industry and help you position your staffing company for growth.
In the end, it’s about making your credit, your money and your resources work harder for you, without putting your staffing business or personal financial profile at risk.
So while many staffing company owners have their reasons for self-funding, often the benefits of choosing the right funding partner can overcome the barriers they’ve created between their staffing company and opportunities for financial flexibility and growth.
More and more staffing companies are choosing not to self-fund and using asset based lenders not because they have to, but because it offers them the flexibility, opportunities for growth and the competitive pricing they’re looking for. With a strong funding partner in place, they know that when the next big customer calls, they’ll be in a position to say “yes” to the business without hesitation from a funding standpoint.
