Financing a startup staffing agency isn’t always easy. However, the employment services industry is growing in leaps and bounds. The market, of which temporary staffing accounts for 53 percent of sales and permanent staffing accounts for 43 percent, is now valued at more than $23 billion, Statistics Canada reports.
Financing Needs of Staffing Agencies: At a Glance
Funding payroll has always been a challenge in the industry. However, increases in wages and salaries, as well as operating expenses, are outpacing industry growth, leading to even tighter margins than usual. Because of this, staffing agencies often need funding early and require cash injections as they scale in the years to come.
Staffing Agency Funding Options
Thankfully, staffing agencies can tap into a variety of funding options. Explore the pros and cons of each below.
Traditional vs. Modern Financing Methods
Whereas traditional lending tends to be rigid and comes with fixed repayment terms that must be met regardless of business performance, modern alternative lenders offer greater flexibility and often higher approval rates.
Debt Financing for Startups
Debt financing refers to borrowing money that must be paid back. It may be ideal for some business owners because it allows them to retain full ownership of the company, and interest is tax deductible. However, startups and small businesses must usually provide collateral to qualify, and payments can impact cash flow for years to come. Options such as traditional bank loans fit into this category.
Equity Financing for Startups
Equity financing refers to receiving working capital in exchange for a share of the company. Some business owners prefer this method because there’s nothing to pay back, and it’s less risky than taking on debt. Plus, investors often understand the industry and can be instrumental in the company’s growth in ways beyond supplying capital. However, many business owners avoid equity financing to retain sole decision-making power and the pressure associated with meeting investors’ expectations. Options such as venture capital fit into this category.
Non-Repayable Funding for Staffing Agencies
There are also funding options that don’t require any repayment or giving up any equity. Although rare, these opportunities are a favourite among startups and small businesses. Grants fit into this category.
6 Options for Financing Your Startup Staffing Agency
Now that we’ve covered the background let’s explore some specific types of financing for startup staffing agencies.
1. Traditional Bank Loans for Staffing Agencies
Bank loans are often one of the more affordable ways to obtain funding, with the typical interest rate sitting at just over six percent, per Statista. Traditional term loans are paid off in monthly installments over a period of three to ten years and can range from around $50,000 to $500,000. Short-term loans of $5,000 to $250,000 are usually paid off in three to 24 months. It can take anywhere from a few weeks to a few months to receive funding.
It’s easier for small businesses to qualify for an asset-based loan than an unsecured loan. However, even if collateral is available, banks still evaluate the business based on its credit score, time in operation, cash flow, profit, and other details.
2. Invoice Factoring for Staffing Agencies
Invoice factoring involves selling unpaid B2B invoices to a third party called a factoring company. The factoring company immediately sends you most of the invoice’s value and then waits for your client to pay. You receive the remaining sum minus a small factoring fee when your client pays. This unique structure means there’s nothing for your staffing company to pay back.
The amount you can receive through factoring depends on the size of your invoices, so businesses can receive anywhere from a few thousand dollars to hundreds of thousands. Factoring fees vary but are typically between one and five percent of an invoice’s value. You choose which invoices you factor, so you have control over your total costs.
Because your client pays the invoice, factoring companies don’t scrutinize your credit or other details, and it’s easy to get approved. Payments are usually deposited directly into your bank account via ACH, so money is available within about two business days. However, some factoring companies offer same-day payments.
3. Business Lines of Credit
A line of credit (LOC) is a form of debt financing that works similarly to a credit card. You can draw from the available funds until you reach your limit. Monthly payments are required anytime funds have been withdrawn.
A typical limit is around $100,000, and interest rates can vary between three and 27 percent. Funding is usually made available immediately after approval, though getting approved can be difficult. Most lenders will expect some form of collateral.
4. Angel Investors and Venture Capital for Staffing Agencies
Venture capitalists and angel investors in the staffing industry are difficult to come by. Angels invest their own money, and venture capitalists invest the money of others. They both provide equity funding, meaning you’ll give up some control of your company. That means there’s nothing for you to pay back, though they usually only invest in startups they believe will grow rapidly with the intent to exit and gain a profit. The amounts and terms vary dramatically because each arrangement is unique.
5. Crowdfunding for Staffing Startup
Crowdfunding simply means many people are coming together to provide funding rather than a single person or entity. Because of this, it’s a broad category.
Peer-to-Peer Lending for Business
Peer-to-peer (P2P) lending works like a traditional loan and is a type of debt financing. Modern P2P networks have requirements and terms similar to banks, too.
Equity Crowdfunding for Business
Equity crowdfunding works like venture capital. You have no debt to pay back, but your backers receive a stake in your company.
6. Staffing Agency Grants and Business Competition Financing
Money gained through grants and business competitions doesn’t have to be paid back, and the business doesn’t have to give up any equity, so it’s a highly sought-after form of funding. Each program is different, so there are no standard requirements or payout amounts. You’ll need to research each one. Due to the fierce competition, winning competitions and qualifying for grants can be difficult.
Evaluating Financing Options for Staffing Agencies
There’s no single “best way” to secure financing for a startup staffing agency. The ideal funding solution will vary based on your business needs, how much control you’re comfortable giving up, which options you qualify for, costs, and other details.
Get a Free Invoice Factoring Rate Quote
Invoice factoring is often the ideal choice for growing staffing companies because you can qualify even when your company is in the startup stage and tap into funding as needed as your business grows. If factoring sounds like your ideal solution, request a complimentary rate quote.