Most staffing agencies choose payroll factoring as their type of staffing agency finance. With factoring, staffing firms sell their accounts receivable invoices for a fee to the factor and gain cash up front to pay their employees and other parties.
There are two different types of factoring.
- Recourse – With recourse, the staffing firm assumes the risk and losses for unpaid invoices. As a result, the staffing firm must buy back invoices that their customers don’t pay in a fixed amount of time.
- Nonrecourse – With nonrecourse, the factor assumes the risk of bad debt and is out the money that it is unable to collect. This is safer for the staffing agency but riskier for the factor. This method is often used in 80/20 rule situations, in which 80 percent of your business comes from 20 percent of your clients, and if they failed to pay, your business would suffer greatly.
TemPay provides the former, recourse funding. Most factors provide this type of funding because it carries less risk. If a factor does offer nonrecourse funding, it typically comes with a significant fee.