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Why a Bank Loan May Not Be a Good Choice for Staffing Agencies

Posted by Laura D’Andrea

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Jul 25, 2018 9:00:00 AM

Why-a-Bank-Loan-May-Not-Be-a-Good-Choice-for-Staffing-Agencies-compressorStarting a staffing agency is a big undertaking. The market is competitive, and it’s only heating up with unemployment at its lowest in 40 years. You’ll face many challenges in your first year and beyond.

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One of the issues facing staffing agencies at almost every turn is funding. You need consistent funds to pay your full-time employees and your candidates. You’ll also need to pay the Internet bill, the electricity bill, and so on. Your income comes from the fees your clients pay, but they’re billed in 30-day, 60-day, and 90-day intervals. Some of your clients may not always pay on time either.

In this situation, what’s the best option you have for creating consistent cash flow to keep the lights on? You may think it’s a bank loan. Bank loans can offer tax breaks and other incentives, such as lower interest rates than credit cards. You might be surprised to learn this isn’t always the best choice for staffing agencies.

The Costs of Bank Loans

One reason a bank loan isn’t always the right choice for staffing agencies is due to the costs. Taking on a loan creates a new debt for your business, which you then have to repay. Bank loans carry interest, which increases the costs of having the debt. Interest rates and market fluctuations can increase the costs of repayment as well. 

Loans can also be time-consuming. You’ll need to fill out an application. You may even need to create a business plan and present it before you can even be considered for funding. It can sometimes take months before the loan will actually be approved.

Spending this time and effort on obtaining the loan is a cost in and of itself. Time is money, as the old saying goes, so the more time you spend trying to wrangle a loan from the bank, the more money you’re actually spending on the loan.

It Doesn’t Solve Cash Flow Issues

Many staffing agencies take out a bank loan assuming the one-time injection of cash will solve their funding issues. If the issue is cash flow, however, a one-time bank loan likely won’t solve the issue. Most firms find they run through the loan money quite quickly, and then they’re right back at square one. The only difference is now they have an additional debt to pay. 

You need a longer-term solution for your business. Cash flow issues don’t resolve overnight. Instead, think about solutions than can offer you ongoing access to capital, allowing you to bridge the gaps in income and keep the business afloat.

What Can You Do?

You can see why a bank loan isn’t always the best option for staffing agencies. Now you’re wondering what the right option for your business is. 

Payroll financing is often the recommended alternative to a bank loan or even a line of credit. This alternative doesn’t require interest payments. How does it work? Payroll financing involved financing your outstanding receivables to secure immediate working capital. 

In doing so, you’ll sell your outstanding invoices to another company. They’ll give you a portion of the value of the invoice, which generates cash flow for you. They’ll then collect the invoice from your client and pay you the balance. This is a great option if some of your clients have a habit of being late with payment.

What’s Right for You?

You have more options than you think. Explore options for financing staffing agencies and talk to the experts today.

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Topics: Payroll

Laura D’Andrea

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