Payroll funding is the regular process or cycle of billing your customers, paying your employees and getting funded by a factoring company. It’s most often used by staffing companies that are in early-stage or growth-stage business cycles. Since there are about 20,000 staffing and recruiting companies in the U.S., payroll funding is very common.
A staffing agency, also referred to as an employment agency, provides temporary workers for their clients. The staffing company hires and fires the workers, pays their salary, wages and benefits. Oftentimes, agencies perform criminal background checks, credit checks and drug tests.
Staffing companies handle the recruitment and “employer” tasks such as payroll funding, payroll taxes, insurance, ACA compliance, etc. They are the legal owner of the employees W-2. The staffing company can handle all these back office functions themselves or outsource them to a staffing service provider. Often, the staffing companies outsource the work, so they can focus on recruitment.
Staffing firms typically fill temporary and contract job positions for clients that need short-term workers. Businesses hire short-term staff for various reasons such as seasonal spikes, special skilled positions or vacancies from employees leaving or needing time-off. Some temporary staff continue their employment status with the staffing company, while others take on permanent positions (temp-to-hire) with client companies.
Today, many companies want to focus completely on their core business operations, so they hire staffing personnel to fill non-core functions.
Companies that hire temporary and contract staffing receive several key benefits:
- Reduced overhead such as recruiting and training
- Fewer liabilities than having permanent employees
- Greater flexibility and less commitment
It’s been shown that companies that use temporary staff often have increased profits and margins.
Temporary staffing agencies hire a group of employees within certain roles or functions and then place them with their clients. Temporary staff are drawn or selected from a pool of qualified employees. The client requests the number of needed temporary workers and the agency and client negotiate the hourly, daily or weekly pay rates.
Temporary employees are typically less skilled than professional contract staffing employees. Temporary employee positions include office workers, warehouse, factory, retail store and customer service positions. The client benefits include getting a number of employees quickly and knowing that they are qualified for the position.
Contract staffing is a type of temporary staffing that is done on a position by position basis, not on a work group as a whole. Contract employees (sometimes referred to as contractors) are usually professionals or highly skilled employees and chosen individually by the client. The client sends the staffing company its requirements for the job or position, then the staffing company hires and fills the position based on the contractual requirements.
Contract staffing positions can run from 3 to 6 months up to 2 or more years. Companies hire contract staffing for special projects requiring specific skills. They also my hire a contractor so they can determine if the person would be a good permanent employee. Sometimes they hire contract employees to work around hiring freezes or provide flexibility during rapidly changing markets.
Permanent placement companies or recruiting agencies work with clients that need permanent employees. They recruit qualified candidates for them and place them with the client, usually for a flat fee. Permanent placements don’t have a trial period with the client (temp-to-hire) and are never temporarily engaged with the staffing agency. The employee belong to the client company, not the recruiting agency.
Recruiting agencies that provide permanent placement have more resources to find high-level employees than the client’s hiring managers. Recruiters have more time and industry contacts than most hiring managers. Recruiting agencies are usually skilled in particular industries, such as accounting and finance, engineering and technical, or executive officers.
Placement agencies or recruiting services also differ from staffing companies in that they collect a fee to recruit a full-time employee for their client. The client either pays a retainer fee or a placement fee based on the candidate’s salary, depending on the agency’s terms. There is no payroll funding process, just an upfront recruitment fee for placing the employee.
Staffing agencies usually pay their employees on a weekly or bi-weekly payroll. They invoice their clients weekly, bi-weekly or monthly and must wait 30 or more days for payment. This “pay gap” creates a cash flow shortage for the staffing agency. This is the reason many staffing companies use payroll funding or payroll factoring services to smooth-out the cash flow.
Staffing factoring companies, also referred to as payroll factoring companies, will advance the staffing agency cash as soon as the agency invoices their client. The factoring company collects the payments when they become due, usually 15, 30 or 45 days after the invoice date, depending on the staffing agreement.
Some payroll funding companies also handle the back office functions mentioned above such as payroll processing, taxes and insurance. Many smaller staffing agencies outsource these functions, so it’s very convenient when they have a single company handling both the payroll funding and back office functions.
Many factoring companies don’t factor permanent placement invoices because of all the contingencies and possibilities for non-payment or prolonged collections. Permanently placed employees may decide to quit and the client has to replace the person. This can cause uncertain collection issues or delayed payment of the original invoice. Another situation is the client may question the placed employee fulfilled all the original obligations and offset the invoice amount at time of payment.
FactoringClub has more than 100 factoring companies and the majority of them handle payroll funding. We have factoring companies in almost every state in the U.S. and Canada. If you’re staffing agency is looking for a factoring company, visit the FactoringClub website or call our factoring experts at 866-748-7111.