Navigating Your Financial Options: Not All Dollars Are Created Equal Part I

Financing. It’s the lifeblood of a staffing company. A good financial partner can enable growth and allow you to focus on building your staffing business, while choosing the wrong partner can lead to endless headaches, unexpected costs and missed opportunities.

But how do you know if you’re choosing a financial provider that will best suit your needs? The old adage “information is power” continues to hold true. This article should help you sort through the various financial options, the pros and cons of each option and how they can impact your business, as well as reveal insider tips and questions you should know in order to make the best choice.

When it comes to financial solutions for your staffing company, there are essentially four options. (We’ll be covering the first two in this issue): ?

  • Factoring (both Recourse and Non-Recourse)
  • Specialty Asset Based Lending
  • Commercial Lending
  • Angel Investors / Mezzanine Financing

There are two different types of Factoring relationships: Recourse and Non-Recourse. A Recourse relationship means that the staffing company accepts the financial risk of the receivables. A Non-Recourse relationship means that the Factor accepts 100% of the receivables’ risk.  Benefits of a Factor relationship include:

  • A faster underwriting process
  • More flexibility than bank financing
  • Company or owner financials and personal guarantees are not necessarily required
  • Customers’ credit is usually the determining factor in credit availability
  • Owners do not have financial risk of the receivables in a Non-Recourse relationship
  • No concentration limits

With that being said, the trade-off for not taking financial risk or having your company or personal financials taken into account means that Factoring is usually the most expensive funding option. In addition to the cost, you may also find these limitations:

  • Credit limits imposed per customer (vs. your total receivables)
  • The Factor’s name appears on your customer invoice, causing potential customer confusion
  • Weekly invoice verifications required prior to funding
  • The Factor may require customers to make checks payable directly to the Factor
  • Most Factors are not staffing-specific and lack industry expertise
  • Payments go to a lock box, which may result in additional clearance delays and corresponding charges

Some Factors, especially in Non-Recourse relationships, will also take over collections with your customers. This means you don’t have a say regarding the tactics and service your customers receive from the Factor, potentially exposing your staffing company to service issues and headaches beyond your control.

Specialty Asset Based Lending

Asset Based Lenders (ABLs) are oftentimes lumped together with Factors in the minds of staffing company owners. However, they do offer a different funding model and aren’t limited to staffing companies with less than stellar credit or financials.

One of the primary differences between a Specialty Asset-Based Lender and a Factor is that an ABL is industry-specific. So an ABL specific to the staffing industry will have an in-depth understanding of the industry and the specific challenges a staffing company owner may have. Typically, ABLs offer:

  • More flexibility so staffing companies can more quickly and effectively take advantage of opportunities for growth
  • Detailed reporting so they can better understand their company’s financial picture and make better strategic decisions
  • Additional resources such as back office administrative support, payroll processing, workers’ compensation expertise, tax guidance, financial statement preparation and more

As more of a hybrid funding option, some of the Specialty ABL limitations are somewhat of a mix of the cons from both the Bank Line of Credit and the Factors, such as:

  • A more thorough underwriting process
  • Personal guarantees, personal financial statement and credit reports required
  • Concentration limits from 25% to 75%
  • Not all ABLs are staffing-specific
  • Payments go to a lock box, which may result in clearance delays and additional charges
  • Limited financial reporting required (if any)

In terms of the cost of an ABL, each relationship is different. A Funding-Only relationship that involves only receivables funding will be less expensive strictly on a cost-basis than a relationship that involves back or front office administrative support. That being said, it’s important to look at the relationship carefully to understand your true cost of funding, including taking into consideration additional resources and services, added fees, etc.

It’s critical to ask questions and to have a full understanding of how the program works before you enter into any type of funding relationship. In the next issue, we’ll cover Commercial Lenders and Angel/Private Investors as a funding source for your business.

Julie Ann Blazei
President /CEO at Tricom Funding