One of the most difficult aspects of contract staffing from a recruiter's perspective is funding the payroll. The nature of contract staffing requires you, as the employer of the contractors, to pay the contractors BEFORE you are paid by the client. While you pay your contractors weekly or at least every other week, it could be 30 to 90 days before you receive payment from the clients. You could have several thousand dollars outstanding at any one time for just one contractor, let alone several contractors.
But don't let this keep you away from adding what could be a very lucrative line of business. There are a number of ways recruiters can handle payroll funding. You just need to select the one that works the best for your firm.
- Self-funding. This of course is the preferred method for many recruiters because there are no fees and no debt. But unless you can draw from your existing direct hire business, a large savings account, or another source of income, you may not be able to float the payroll until your contract staffing business becomes profitable. Fortunately, there are other options.
- Line of credit. You could simply go to your bank and ask for a line of credit. This can be a viable option for large, established firms, but smaller start-ups may find it difficult to get funds from banks that are increasingly cautious since the recession. Another caveat is that obtaining a line of credit that is either to large or too small could result in unnecessary fees. Finally, banks usually like to lend against hard assets, such as property, vehicles, etc., so you could risk your home or business if a client doesn't pay.
- Payroll funding/factoring companies. Funding and factoring companies, on the other hand, tend to lend against accounts receivables rather than hard assets. They will typically purchase your invoices and then take responsibility for collecting on them. They take a percentage of the invoice and may also hold a percentage as a deposit until the client pays, according to the Staffing Entrepreneur website. The approval process usually moves more quickly than with bank funding. Keep in mind that vendors will often consider your clients' credit rather than yours. While this may seem to be an advantage to smaller firms, these vendors tend to be very picky. You may find yourself turning down business you would like to take. These companies vary in how they operate and what services they offer, so be sure to select a vendor that meets your firm's needs.
- Contract Staffing Back-Office. While the previous options address the payroll funding issue, they don’t relieve the other challenges associated with contract staffing. Unless a funder also processes payroll, you will retain all of the administrative payroll duties, such as timesheet collection, calculating pay and taxes, direct deposit, and tax withholdings and filings. A contract staffing back-office provider will take on these other payroll tasks in addition to the funding. Plus they become the legal employer of your contractors, which means they handle all the other employment responsibilities, as well, including contract negotiations, Workers’ Compensation, unemployment, benefits administration, background checks, invoicing and collections, and more.