Staffing blog

A Guide on How to Start a Temporary Staffing Agency

By 06.09.21November 29th, 2021No Comments
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Optimism for robust economic recovery is growing as the vaccine rollout continues creating an expectation for near-normal activity to resume during the coming summer months. With anticipated upswings in almost every sector of the economy, the staffing industry is anticipated to resume its historically robust growth.

Throughout normal economic conditions, and certainly during these recovery months, all private, public and government entities of every size experience uneven workload and periods of peak activity. At the same time, many entities are evading increases to legacy costs and liabilities by avoiding the addition of long-term commitments such as hiring new full-time employees. The Bureau of Labor Statistics reports that in January of this year, employment in professional and business services rose by 97,000, with temporary help services accounting for most of the gain. This can be signs of the emergence of a new SMB business model. As the new normal unfolds, industry watchers who monitor trends are noticing a resurgence of demand for information on how to successfully start a temporary staffing agency.

Following is a guide on how to start a temporary staffing company to help entrepreneurs on their journey through business ownership.

Getting Started

Even though the staffing industry is flooded with what seems like a temporary staffing agency for every type of industry and job you could imagine, the market for qualified and reliable people still goes unfulfilled in too many cases. Your success as a new staffing agency that is able to meet demand better than the competition requires a good business plan. Take your time to research, strategize and do your due diligence. Consider the following when building your staffing agency’s business plan:

Tap Into Your Expertise

Are you an expert in a particular niche that you can exploit to your advantage? Do you have staffing agency sales or administrative experience? Are you a great recruiter that your clients can depend on to source the talent they need?

In your self-analysis, be accurate about your skill set and where you have holes to fill. As with starting any business, make sure you have the knowledge and resources to succeed long-term. Choose wisely based on a real-world understanding of the skills you have and the type of people you must surround yourself with to thrive in business.

Create a Weekly Cash Flow Budget

The more successful your staffing agency becomes, the greater your need for working capital. A cash flow analysis is required detailing the exact dates of when all your bills need to be paid and a conservative estimate of when you will receive payment from your clients. Typically, customers pay 30-60 days after you invoice them. A flexible working capital solution is needed to ensure the on-going sustainability of your agency – options to meet this financial need is investigated further into this guide.

Stay in Your Lane

Better returns on your investment will come from providing expert service in a narrow niche. Gross margins for a staffing agency can run from 15-50%. At a 15% gross margin, there is no room for a misstep or even one dollar of bad debt. In today’s economy, clients are increasingly searching for people with specific skill sets tailored to the job that needs completion. If your staffing agency is too general it will result in being overwhelmed by client demand for a broad range of employee skills with little means to source and recruit the talent needed.

For that reason, you must have a target market. You will be able to land higher-quality clients. Also, it will grant you the flexibility to say “no” to vacancies that do not fit your niche. You should have deep expertise in your area and choose a market that will keep your company profitable over an extended period.

How do you become knowledgeable in a niche? This is the age of easy access to information – research your larger, successful competitors, then emulate what they do well and improve upon their weak points. With the proper research, drive, and knowledge, you can quickly become the best in class with your specific offering.

Recruiting Talent

Start recruiting to acquire highly qualified workers for your staffing agency. Applicants to your customer’s jobs must be carefully screened via resume, LinkedIn, background checks, and interviewed before you hire them. They are representing your company and must be vetted thoroughly before hiring. Make sure to verify the schools attended, certifications and jobs listed on their resume.

Legal Advice & Counsel

Ensure that you work with an attorney experienced in staffing and labor law. Acquire all of the documentation and contracts that you will need, along with information on the laws that pertain to staffing agencies and your industry. A proper staffing and labor law attorney is a sound investment. Importantly, where you incorporate your company and the state(s) you derive your sales from is another big decision you need to research and make.

Failure to follow the federal, state, and local laws on withholding taxes and workman’s comp rules and classifications can cause personal liability and break the corporate veil. Ignorance of labor and employment laws is not an excuse!

Liability Insurance & Workman’s Compensation

You will need insurance protection for general liabilities, worker’s compensation, and any accidental damages caused by your people working at a client’s location. You will want to meet with a commercial insurance professional and precisely discuss what your staffing agency will look like and the proper risk protection needed.

Your customers will also require proof of insurance, and many will need higher levels of coverage than you envisioned. The proper job coding and classification of your employees is critical. Do not be tempted to classify warehouse personnel as clerical to falsely improve your gross margins. This is a common criminal action by company owner(s) in some jurisdictions.

Office Space

Following the disruptions of the pandemic and work at home orders, physical office locations are no longer the status quo. Depending on your niche market and location, you don’t need an office to build a great staffing agency. Instead, you can concentrate resources to build a great team and use technology for collaboration and communication. With the right business model in place, you can scale up quicker and more nimbly without an office. Use the money you save to invest it in people and tools, and set your recruitment agency up the right way.

However, you might be targeting an industry that warrants having your customers and hires visit you. In this case, be sure to have an appropriately appointed office environment in a suitable location with easy access to parking. Try and keep the rent cost to a minimum to avoid high fixed costs.

Business Management Software

Your ability to source recruits, monitor productivity, track employee’s hours and record customers’ satisfaction level is crucial to your success. Servers, workstations, accounting and staffing industry software can be expensive. However, there are cost-effective, cloud-based solutions available that can be scaled up and down with your growth prospects.

When your hires take on new job positions, the ability to hit the ground running and be productive from day one is just good service and a definite selling feature for your staffing agency. How are you set for assessing the skill set of new hires for specific jobs? What tools do you have in place to train and measure job skills? A substantial talent acquisition, training, and retention strategy may require working capital investment, but it will separate you from competing temporary staffing agencies.

How to Finance Your Staffing Agency

You have a chosen a staffing niche, acquired the needed resources and have hired personnel who will provide significant value to your customers. However, your staffing agency has the startup capital for just 25-30 days of operation, and your largest customers won’t pay your invoices for 45-60 days. How will you fund 6-8 weeks of payroll when your people want to be paid bi-weekly?

You cannot think about payroll processing, people scheduling, or an invoicing system if there is no money to cover more than 1-2 weeks of payroll! Successful staffing agencies need a flexible funding solution to ensure payroll is met on time.

Bank Line of Credit

When it comes to borrowing money, a new staffing company will typically make a trip to their local bank. However, this option will not work for many new staffing agencies for many reasons.

Why is a bank not a viable option for many start-ups and young staffing companies? Banks typically are not:

  • Start-up friendly.
  • Open to new borrowers with high customer concentration.
  • Lending to those with bruised personal credit.
  • Making loans to a business without two years of tax returns and YTD financials showing good cash flow and debt coverage.

A start-up staffing agency with few customers and losing money for the first few months or more is most unlikely to acquire bank financing. A flexible alternative funding option is needed to ensure the sustainability of your agency.

Invoice Factoring

Invoice factoring is the ideal alternative funding solution for new or established staffing firms to provide your business with the capital it needs to safely and cost-effectively grow in scope and size. The factoring of invoices accelerates cash flow by converting accounts receivables into immediate cash. The process is simple and easy to manage:

Step 1: You invoice your customers and send a copy invoice to the factoring company.

Step 2: The factoring company pays an advance of up to 90% of the value of your invoice, holding the remaining balance as a reserve.

Step 3: The factoring company collects payment.

Step 4: The factoring company releases the reserve and pays the remaining balance due.

Step 5. A small fee is deducted from invoice amount.

By working with an invoice factoring company, your staffing agency receives up to 90% of the net invoice amount immediately versus waiting extended periods to receive payment from your client. When your client pays the invoice in full to the factoring company, your staffing agency receives the remaining balance due. All funds are transferred directly into your account for the most expedient means of receiving funds.

How to Choose an Invoice Factoring Company

Invoice factoring is a fast and convenient source of cash flow, but it is important to choose a factoring company that understands your industry and will work well with your agency. Following are a few things that you should research about the factoring company you are considering to work with:

  • Industry knowledge: It is important to determine if the factoring company truly understand the staffing business, has the expertise to resolve unexpected issues quickly and will have your back should external pressures threaten your financial stability.
  • Dedicated customer service: The benefit of invoice factoring is to provide fast, dependable funding without hassle or delay. Ensure that the factoring company you choose to work with provides a dedicated account manager and easy access to your online account for streamlined service, convenience and transparency.
  • Trust: The factoring company you choose to work with is your financial partner – make sure they are worthy of your trust. Check the company’s website for reviews and testimonials. Most importantly, check the fine print on their factoring contract carefully – ensure there are no hidden fees and no surprises before committing to any one factoring company.
  • No minimums: Some factoring companies have a minimum invoicing amount per month you must process. It is best to choose a factor with no minimum requirements.

How Does Invoice Factoring Help Temporary Staffing Agencies?

Speed of funding

The best factoring company for your staffing agency will qualify you and start funding within a few days. An onboarding specialist will introduce you to the funding process once your account has been set up and cash will then be deposited into your account within 24 hours of submitting invoices. 

Flexibility

Invoice factoring allows you to receive money for invoices based on the growing demands of your staffing agency. Invoice factoring is the only funding option tied to sales volume. The more invoices you issue to credit worthy customers, the more working capital becomes available to support operations and pay bills. Without cash flow worries, you and your workers can stay focused on growing and expanding the company! You also have control on how to use advanced funds, whereas bank financing is governed by restrictive covenants. Rather than having to wait for approval by a lender before making any growth-based decisions, you have the freedom to spend on what you need and expand your company at the rate that you choose.

Fast Unlimited Working Capital

Because an invoice factoring facility converts invoices into cash without governing covenants, access to working capital is relatively unlimited. Volume of sales and the credit quality of your customers is the main metric determining your company’s credit limit. The more sales you produce, the more working capital becomes available.

This fast funding solution is a highly convenient service to use and manage as the factoring company will handle much of the necessary paperwork and administrative processes involved. Real time monitoring of transactions, credit limits, historical data and much more is available through 24/7 access to your online account for full transparency.

Ease of Qualification

With many other financial lending options, you will find yourself going through a rigorous qualification process before receiving any money. Due to the fast-paced nature of staffing agencies, long wait times for working capital is not feasible. Qualifying for invoice factoring is much faster and far easier than compared to other financing options.

Zero Debt

One of the biggest hurdles that any company will face when utilizing bank financing to meet capital needs is the accumulation of debt. Invoice factoring is not debt financing, it is the sale of an asset at a discount in exchange for immediate cash. You don’t accumulate debt nor do you need to record the transaction as a loan payment or long-term liability. This will keep you and your employees focused on growing your staffing agency and not playing ‘catch-up’ with any debt.

Credit Protection

In your business life, there’s one thing worse than having no sales, and that’s selling staffing services and not receiving payment. Your invoice factoring company will evaluate all your potential new customers for creditworthiness. A trained and professional collections team will follow up with your customers if payments are delayed or delinquent. They are trained to be courteous and effective to protect your customer relationships as they improve accounts receivable management. This service provides further protection against the possibility of bad debt.

Hopefully this short guide to starting a temporary staffing agency has been helpful. eCapital is an industry-leading alternative lender with the flexibility to provide solutions to difficult financial challenges and the resources to fund your business goals. Strong client relationships anchored in mutual trust are the core of our business.

To learn more about invoice factoring and commercial financing services, visit eCapital.com