Financing and Funding Options for Staffing Agencies
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Starting a staffing agency can be a lucrative and fulfilling business venture, but it may require a significant amount of capital to get off the ground. In this article, we will explore some of the financing and funding options available to help you scale or get your staffing agency up off the ground.
How do staffing agencies work
Staffing agencies are companies that recruit temporary and permanent employees for other businesses. Staffing agents become experts on the hiring process and work to make the process smoother for employers so that they don’t have to hire their own HR or recruiting teams. These agencies review the qualifications of applicants and conduct preliminary interviews, significantly decreasing the time of the hiring process for the client. Working with recruiting agencies is common in many industries, including:
- Accounting and finance
- Sales and marketing
The recruitment process
You can hire a recruiting agency or staffing agency to fill any open position, from entry-level jobs to executive positions. The processes and procedures may vary slightly depending on the preference of the agency, the niche industry, and the client, but most agencies follow these general practices:
- Employer contacts the staffing agency – Companies that are looking to fill a position reach out to a staffing agency that specializes in their field. The potential employers give details to the agency about the position they want to fill, including the pay range, required skillset, and whether the position is short-term or long-term.
- A contract is signed – After the staffing agency has received an outline of the business needs of their new client, both parties sign a contract. The contract, or service agreement, explains the relationship, payment, and any other relevant terms and conditions of the placement.
- Review candidates – Once the recruitment business has a contract with an employer, they will review their current portfolio of jobseekers, reaching out to anyone that may be a good fit. If the staffing agency is not working with enough qualified candidates, they recruit new clients using a job search site like com or LinkedIn.
- Interviews – Staffing companies will interview potential candidates before sending them to the hiring company. They may conduct a background check and drug test, as well as check references from previous employers. Typically staffing agents send a predetermined number of qualified candidates to the employer, as stated in the contract. The candidate will be either permanently hired by the employer or remain an employee of the staffing firm, depending on the longevity and specifics of the assignment.
How to open a staffing agency
If you’re ready to move from “recruiter” to “owner of a staffing agency,” you may be wondering exactly what needs to be done to start working and making money. Check out this step-by-step guide to opening your new staffing agency.
- Choose a niche industry – Most staffing agencies work primarily in one industry, so the first step in owning your own recruiting firm is to choose your industry. It’s best to start with your own experience. Most recruiters staff businesses operating in industries they have experience in. If your experience is not applicable or is broader than one field, consider reviewing small business industry reports to see what fields are doing well and thriving through periodic changes in supply and demand cycles.
- Create and register your entity – You’ll need to come up with a business name and confirm that it is not already taken. You’ll also need to decide what organizational structure you will choose for your business. There are pros and cons to each structure, but small business owners typically start out as a sole proprietorship, limited liability company (LLC), or partnership. It is also possible to structure your staffing agency as a corporation, but it’s important to understand the tax implications of a corporate structure. You can receive an employer identification number (EIN) from the IRS and register your organization with the state.
- Make a business plan – A business plan lays out the new business model of your staffing agency. Business plans are required to apply for business funding and grant opportunities. A good business plan will also help the business owner make decisions about operations and be prepared for cash flow and revenue fluctuations. Your business plan should include details about financing the business, day-to-day operations, marketing strategies, and include a competitive analysis of the industry.
- Move forward – Once you have a business plan intact for a new staffing agency, it’s time to move the venture forward. The next steps may include securing a funding solution, finding office space, contacting potential clients, and hiring employees, depending on the business plan and entrepreneurs’ goals. It is also necessary to get all required licenses and permits and purchase business insurance before you are ready to open for business.
The benefits of owning a staffing agency
There are advantages and disadvantages to running a small business and providing staffing services. Before launching your grand opening, consider the following benefits:
The pros of owning a staffing company
One of the most obvious advantages of opening a staffing company is independence. When you start your own business, you have the final decision-making power on things like hours, services, growth strategies, mission statements, back-office culture, and more. Becoming your own boss is an empowering step toward professional success. Other benefits of starting a staffing agency include:
- Variety – Running a recruitment business keeps things interesting. Every hour will be filled with different tasks, from meeting new clients to hosting open houses, mentoring interviewees, and keeping up with industry standards.
- No formal certifications – You don’t need any certifications to get started—if you want to start a recruiting agency, you can just start building your network and making connections.
- Unlimited earning potential – When you start your own staffing agency, the sky is the limit when it comes to income. As an entrepreneur, you can be in control of your revenues, expansion efforts, and networking strategies.
- Repeat customers – As a recruiter, you’ll have the privilege of working with several different companies at once. Doing good work and presenting qualified candidates will result in the company using your services in the future.
How much does it cost to open a staffing firm?
There are many different types of staffing agencies. Your vision may include a one-person shop where you work from a home office, or it may be a multi-location franchised staffing business. The amount of startup money you will need depends on the type of business you’re starting, your location, service pricing, and the business plan. The average cost to operate a staffing agency is $24,560 which may consist of the following expenses:
- Legal fees to form the entity
- Insurance costs
- License and permit expenses
- Website design
- Computer hardware and software
- Payroll costs
- Commercial real estate – rent or mortgage payments
- Advertising costs
- Subscriptions to job search sites
Financing options for staffing agencies
If you’re ready to launch your new staffing agency, the final step is to explore financing options. There are many different funding companies, online lenders, and traditional banks that have experience working with staffing agencies and startup entrepreneurs. Choosing the right funding will depend on your business goals, business and personal credit scores, fixed assets, and time restrictions. Consider speaking with a small business lender about one or more of the following financing options.
Staffing factoring is also called invoice factoring or payroll funding. It is a type of funding option where the borrower receives a lump sum payment upfront in exchange for unpaid invoices. Invoices are issued to clients in a normal fashion, with a change made to the “remit to” instructions and a copy sent to the factoring company. The provider purchases the invoice and advances up to 90% of its value to the staffing agency. Once the invoice is paid, the factoring company releases the remaining balance to the staffing company, less the predetermined factoring fees.
Factoring is a popular source of funding for recruiting companies because staff agencies are typically forced to wait 30 to 90 days to get paid for their services. Using a factoring company to fund payroll or other working capital needs means you can use your accounts receivable balance and outstanding invoices to cover current expenses, like payroll taxes, utility costs, and rent. Staffing agencies prefer this type of financing because the approval process is easy, upfront funding can occur as soon as the same day, and candidates can be paid promptly.
Business line of credit
A business line of credit is a type of revolving credit that works like a business credit card. A line of credit becomes available when a business owner is approved for a maximum credit amount. The borrower can then withdraw funds on that credit line at any time if available credit exists. Repayment schedules for lines of credit typically require the borrower to make monthly payments, where the amount is determined by the amount of withdrawn funds and the interest rates. Lines of credit offer flexible funding since the business only borrows what it needs, so they are very popular among staffing agencies where revenues fluctuate from month to month.
SBA loans are a great small business loan option for many staffing company owners. The U.S. Small Business Administration (SBA) works with registered SBA lenders to guarantee a portion of the loan amount. The SBA backing makes these loans more obtainable for small businesses that are not eligible for a traditional bank loan. There are many types of SBA loans, which dictate the maximum loan amount, repayment terms, and permitted use of the funds. The most common types of SBA loan programs include the SBA 7(a), Microloans, disaster loans, and SBA Express Loans.
SBA loans can be used for any number of reasons and are approved for up to $5 million. The proceeds can be used for working capital, commercial real estate, franchise financing, payroll financing, renovations, debt refinancing, and more. Borrowers repay SBA loans with regular monthly payments that include a fixed or variable interest rate.
A term loan is a traditional type of loan where the borrower receives an approved amount of funding upfront and repays the loan according to the repayment terms. Business loans can be secured or unsecured and may require a personal guarantee. Term loans can be approved for amounts up to $500,000 and the eligibility requirements depend on the lender and the amount of the loan. The application process for a term loan may include a request for personal and business documents including:
- Identification documents
- Business bank statements
- Copies of recent federal income tax returns
- Current debt schedules
- Business plan
- Financial statements
Merchant cash advance
A merchant cash advance (MCA) offers small business owners a fast financing option where they receive a lump sum payment upfront and repay the loan with future credit card sales. This is a great financial tool for staffing agencies that receive a large portion of revenue from business credit card sales. MCAs are especially helpful to borrowers with bad credit but can be expensive when processing fees are considered.
Operating your own staffing agency can be a very rewarding experience. Once you’ve narrowed down your business with an industry niche and unique business name, you can get started registering your entity, purchasing business insurance, and connecting with clients. There are many different financing options available to staffing company owners, although many entrepreneurs choose to start with staffing factoring or invoice factoring. If you are ready to consider which business financing option will help your vision become a reality, chat with an expert at Biz2Credit today. Ask them to share the story about how they arranged business funding for The Party Staff, Inc., a hospitality and event staffing agency owned by Brian Lillie.