Article by Paragon Financial
With the steady growth in almost every sector of the US economy, there is one area with historically robust growth: the staffing industry. All private, public, and government entities of every size experience uneven and peak workload that requires additional personnel to get the job done. Also, many entities do not want to add to their legacy costs and liabilities with the addition of more full-time employees and look to staffing agencies to fill their workforce needs. Demand for information on how to successfully start a staffing agency has never been higher.
Solving these problems by providing high-quality temporary or full-time workers and understanding the needs of these companies creates the need for start-up staffing agencies. Here’s a guide on how to start a staffing company to help entrepreneurs on their journey through business ownership.
What Do I Need to Get Started?
Even though the staffing industry is flooded with what seems like a temporary agency for every type of industry, job, and needs you could imagine, perplexingly, the market for qualified and reliable people many times still goes unfulfilled. To increase your odds of being successful in this space, you need a definite game plan written out in advance. Reality and execution might vary considerably from your plans, and define the relevant variables before you launch, is essential.
Variables to Plan for when Starting a Staffing Company:
What is my Background
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, and your clients can’t get enough of the talent you find? 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 new staffing agency, the higher your need for working capital. A cash flow analysis is required based on the exact dates all your bills need to be paid and a conservative estimate of when you will get paid by your clients. Typically, 30-60 days after you invoice them.
Since Paragon is a staffing finance company, we will talk much more about this at the end of this paper and how you can use our advance payroll funding to receive 90% each week against your billing to cover the vast majority (99%) of your costs.
What is My Niche?
Better returns on your investment will come from providing expert service in a narrow niche. Gross margins in staffing can run from 15-50%. At a 15% gross margin, there is no room for a misstep or one dollar of bad debt. In today’s economy, clients are increasingly searching for people with specific sets of skills tailored to the job that needs completion. Being too general will result in a lack of employees that have any broad competency in their respective expertise and an overwhelming amount of client demands that will make it unlikely for your temporary staffing firm to survive long-term. 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 niche and choose a market that will keep your company profitable over an extended period. The key is specificity and locality.
Paragon, for example, has broad IT and nurse staffing financing, guard service funding, and credit protection experience. We also target sales of staffing-related services to every level of government where many A/R funding companies shy away from financing government sales and the subsequently created government accounts receivable. Teacher staffing company factoring is a relatively new niche with the growth in charter schools.
How do you become knowledgeable in a niche? A great thing about our Internet Age is that you can immediately 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.
Whom Can I Get on My Team?
It would be best if you start recruiting to acquire highly qualified workers for your team. 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 any candidate for your team. Make sure to verify the schools attended, certifications and jobs listed on their resume. Sadly, resume fraud a real problem these days.
Legal Advice & Counsel
One of the most distasteful things about starting any staffing firm is the enormous amount of legalities that are involved. Staffing firms vary from IT, nursing, clerical, laborers, drivers, or ware-housemen. The amount of paperwork you need for your business, your clients, and your workers are endless and ever-growing. Failure to follow the Federal, State, and Local laws on withholding taxes and workman’s comp rules and classifications can cause you PERSONAL liability and break the corporate veil. Ignorance of labor and employment laws is not an excuse!
Ensure that you work with an experienced staffing lawyer to 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.
A friend of Paragon and veteran staffing industry attorney, Diane Geller, makes the valid point “The worst states for legal locations are in the West and Northeast, where lawmakers commonly consider regulations to be tools for social change and, consequently, administrators find compliance difficult for staffing firms. More likely in these areas than in other parts of the country, judges tend to certify cases for trial that wouldn’t pass otherwise.” Geller goes on to say, “Some states prohibit non-competes by statute and then there are states like New York, where enforcement requires a narrowly tailored agreement, so employers usually pay employees not to play.”
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. As with the previous requirement, you will want to meet with a commercial insurance professional and precisely discuss what your business will look like and the proper risk protection needed.
Your customers also will 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.
Like in real estate, one of the most important things about operating a staffing firm is the office location. You want to aim for a professional atmosphere in a place that is easy for clients and future workers to find. You only get one chance at a good first impression. As author JK Rowling said, “A good first impression can work wonders.” However, you might be targeting an industry where your customers and hires never visit you, or you need easy access to plenty of parking for your hires. Try and keep the rent cost to a minimum by choosing a “B or C” location to avoid high fixed costs.
Software to Manage Your People & Clients
Your working capital is probably limited, but your ability to track recruits, hires, specific jobs, employee’s hours, and your customer’s satisfaction is crucial to your success. Servers, workstations, accounting, and staffing industry software can be expensive. However, there are cloud-based solutions that you can have with the limited initial investment and can flex up and down with your growth prospects.
How are you set for training and the ability to quickly ascertain your new hires’ skill sets for specific jobs? Excellent service and selling feature is the ability for your hires to hit the ground running versus weeks of low productivity. For example, a new hire might be at 33% efficiency for entering data or telemarketing. It can take 2-4 weeks to get that person to 100% productivity. What tools do you have in place to both measure current and growing skill aptitude? A substantial talent acquisition, training, and retention strategy will separate you from the pack.
Note: Everything else will be more accessible when you reach and meet all the above criteria.
Next: How to Quickly Grow Your Staffing Company Above the Break-Even Point
You have decided to start a staffing agency that will quickly (hopefully) be very profitable, fund your lifestyle and in the future, fund your retirement on its sale. You have a chosen staffing niche where your clients can retain through your temporary workers during busy periods, emergencies where a full-time worker needs to be replaced, or even permanent workers supplied by you to reduce your client’s legacy employee costs.
Finally, you have your perfect office space picked out, and hired personnel who will provide significant value to your customers. However, there is just one problem with this entire situation. Your staffing agency has the startup capital for 25-30 days of operation, but 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 at very the minimum 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!
What are my Working Capital Options?
Line of Credit from the Local Bank?
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 an excellent choice 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 & YTD Financials with all showing good cash flow and debt coverage
Well, since you are a start-up with only one customer (at first) and losing money for at least the first few months; a regulated bank is probably not going to be the answer to your working capital needs via a staffing loan or temp agency lending when you start your staffing business.
Staffing & Payroll Funding from an Invoice Factoring Company?
Non-recourse invoice factoring designed explicitly for staffing firms can provide your staffing business with the capital it needs to safely and cost-effectively grow in scope and size. Non-recourse invoice factoring provides businesses cash flow by selling client invoices due in the future to a third-party factor. The company receives up to 90% of the net invoice amount immediately versus waiting extended periods to receive payment from their client.
In exchange for the service, the A/R funder receives a time-based fee to cover the Working Capital, A/R Management, and Credit Protection Services that they are providing. The fees can be very reasonable (considering they include Working Capital, Credit Protection & A/R Management) and are flexible depending on your circumstances and will decrease as your factored volume increases. Fees can run from 1.25-2.5% per 30 days, including all the services, and the cost can flex down as your volume grows.
Although invoice factoring can be a wonderful source of cash flow for staffing agencies, there are a few things that you should research about the staffing factoring company you work with:
Research if the factoring company has a minimum invoice amount per month to finance your transactions. Paragon’s typical clients have sales of $25,000-$2,000,000 per month. However, we can deal with a staffing company in its early months as it grows to $25,000+ in monthly sales. More importantly, if you don’t think you can get to $30,000+ in monthly sales relatively soon, you won’t make much of an income. You want to create a company and just not a job for yourself.Some Factors might have a minimum or maximum total amount of invoices when you request funding. Some also have time limits on invoice terms, anywhere from 60-90 days. With Paragon’s Credit Protection and Non-Recourse Programs, this is not an issue for you or us.Many staffing factoring companies cannot deal with any outstanding legal or tax problems on yourself or your business. At Paragon Financial, with 26 years of taxing authority experience, we often work through legal and tax issues to get you funded and have worked with taxing authorities to subordinate their position to Paragon.Most importantly, does the factor have broad experience in your chosen staffing niche? For example, if you need teacher staffing company financing, do they have experience in that specific industry and class of clients. You can’t trust neophytes with the responsibility for your cash flow, credit, and A/R management. The care and handling of your customers are critical too. You will enjoy Paragon’s famous “soft touch” with your clientele.
How Does Invoice Factoring Help Temp Staffing Agencies?
As previously mentioned, invoice factoring is one of the fastest ways to turn invoices into ready cash (many times the same day!) This is particularly useful if your clients take 45-75 days to pay your invoices. Meaning, you spend less time worrying about the next payroll. That said, you can devote more time to expand the sales and profits of your staffing agency.
Invoice factoring allows you to receive money for invoices based on the growing demands of your business. If your agency has increased in size and needed a capital boost, submit more invoices. Without the cash flow worries, you and your workers can stay focused on growing and expanding the company! You also control how to use advanced funds.
The great thing about an invoice factoring company paying you for your invoices is that they do not have an influence on your purchases besides making payroll, paying taxes and insurance with the monies advanced to you on a timely basis. Rather than having to wait for approval by a lender before making any growth-based decision, you can spend on what you need and expand your company at the rate that you choose. Just be careful and watch your gross margins closely.
Fast Unlimited Working Capital
Invoice factoring companies will handle much of the necessary paperwork and administrative processes that are involved in the funding facility that they give you. Instead of spending long, tedious hours processing paperwork, you will be able to re-direct your time towards growing your business while enjoying advanced payroll funding based on your invoices of up to 90%.
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. You can qualify much faster for working capital from Paragon compared to other financing options. We have funded new clients in just three days. However, after the first funding, same day funding is the norm.
One of the biggest hurdles that any company will face, whether it’s a staffing agency or not, is the accumulation of debt that eventually has to be paid off. Invoice factoring is not a loan but an asset sale where the money is paid back rapidly. You won’t need to record this as a loan payment or long-term liability. This will keep you and your employees solely focused on growing the company and not playing ‘catch-up’ with any debt.
In your business life, there’s one thing worse than no sales, and that’s selling staffing services and not receiving payment. With Paragon’s Non-Recourse and Credit Protection Programs, you have protection if your customer files bankruptcy. We also pre-approve all your potential customers for creditworthiness. With Paragon, you always get a free, unlimited Credit Manager.
We hope this short guide to starting a staffing company has been helpful. We want to be your trusted resource. We’re excited to be with you from the beginning to the successful ending of your entrepreneurial journey. Good Luck!