In the simplest of terms, factoring is borrowing money from an individual or company to cover contingent staff payroll. It is useful for many smaller staffing organizations because it affords them the ability to “float” their payroll expenses on someone else’s dime temporarily. This is a great solution if you don’t have the cash to cover the payroll right away or like most agencies, have billed invoices to your client but won’t be receiving the money for 30-45 days after they receive the invoice. This is a common scenario for many temporary placement agencies.
Many agencies utilize factors to finance their payroll because they are just getting their businesses started and don’t have a lot of extra cash to cover ever-expanding payroll for new contractors. However, be aware of the sometimes high costs of using factors for payroll financing.
Staffing agencies borrowing $200k a month to cover their payroll expenses might pay a 3-10% premium or more to a factor for the privilege of using their money. And once an agency starts using a factor to cover their payroll, it could prove difficult for the company to stop using the service because of the premium paid to the factor for the use of the money.
If you’re looking for more information about how factors work, this is a good basic information blog by a completely non-affiliated factoring company: http://www.factoritin-blog.com/factoring-101/.