At various points, many staffing companies will need to seek external funding to support geographic expansion, add new technology, acquire another company or other reasons. It’s essential that staffing company executives select the right financial partner to help them secure the capital they need.
Defining what “right” looks like will vary from firm to firm. But the single most important consideration when evaluating financial partners remains the same: a deep understanding of the staffing industry.
There are numerous business- and revenue-related issues that are more common for staffing companies than those in other industries. If a financial partner isn’t fully aware of these situations, they might make assumptions that aren’t entirely correct, which could impact the amount of capital they’ll make available.
For example, a potential financial partner might not realize that when a staffing firm wins a large client with a multimillion-dollar budget for outsourced staffing services, there’s not any guarantee of revenue; what they’ve won is the opportunity to pursue requisitions/orders.
Payroll obligation is another consideration for a financial partner. It’s common for a staffing company to pay people weekly, biweekly, or monthly, then carry the receivable for that expense for another 30 to 60 days until payment is received from the customer. To help the staffing firm effectively manage cash flow, the lender will ideally provide funding in the amount of the payroll receivable.
Covering payroll receivables and similar expenses needs to be negotiated before a loan agreement is finalized. Lenders typically include a customer concentration risk limit in their loan agreements. The concentration limit puts a cap on how much a staffing provider can borrow as a percentage of the total amount of a customer’s outstanding balance. If the percentage is too low to cover costs associated with items like payroll receivables, it limits the ability of a staffing firm to grow its business. Lenders that have experience with staffing firms will work with you to set the right concentration risk limit for your needs.
The best approach for beginning the search for a financial partner is to get input from staffing firm peers about partners they’ve worked with that demonstrated a strong understanding of the category. From there, you can conduct online research, schedule introductory calls, and otherwise take the necessary steps to develop a short list of potential financial partners.
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Once that is in place, securing the amount of funding you seek requires providing a tremendous amount of detailed information. My experience is that more is more, and you should provide a comprehensive, thorough, data-driven presentation which includes audited financial statements. It will be difficult to achieve the funding outcome you want without these statements to provide objective, third-party validation of your firm’s financial position. You may also want to include a trailing 12-month financial report which provides detailed financial performance data over any previous 12-month period.
Next, you’ll want to offer a look at what lies ahead through business and revenue forecasts. We consistently develop reports that provide anticipated results over a given 12-month period. This enables us to develop detailed month-to-month projections, considering factors such as the differences between months with four weeks or five weeks.
It’s also a good practice to review the different types of contracts you have with customers and any trends you see or anticipate regarding contracts and scopes of work. In short, you should plan to conduct a lot of analytical work, especially around profitability, margins and forecasts, and demonstrate that you really understand the numbers inside and out. When it comes to financial data, the rule of thumb is to provide all the facts about all facets of the business.
It’s also important to talk about the qualitative side of your firm. Plan to spend some time going into details about your top customers, such as the status of their business overall and the relationship with your firm specifically. The key is to demonstrate how well you know your clients — and how much they rely on your firm as a trusted business partner.
The ideal financial partner does more than provide capital; they provide resources and support as a trusted business advisor. That begins with a strong understanding of the staffing industry.