How Do Staffing Companies Get Paid On Invoices Immediately?

 In Staffing

“Since our partnership with OTR Capital, it has allowed us the freedom of stressing about cash flow each week to make our payroll. We submit our invoices in a timely manner to OTR, and they advance us our funds immediately”

Michigan Area Staffing Company

Factoring or payroll funding is used by temporary staffing companies to bridge the gap between the time they must make payroll and the time their customers pay for the contractors. Typically staffing companies have pay terms with their customers that can range from 30-45 days after invoicing; while with a factor, staffing companies are able to get paid on those invoices immediately. This allows staffing companies to do many things from improving infrastructure to paying their employees as often as they want, whether it be daily, weekly, bi-weekly or monthly. More and more staffing companies are providing daily pay to their contractors as an added benefit and factoring helps to facilitate that fast turnaround.

There are essentially three parts to invoice factoring – the advance, the reserve and the factoring rate.

How much do staffing companies get up front?

When a temporary staffing company submits an invoice with the corresponding timesheets to a factor, the factor will immediately fund the staffing company a percentage of the face value of the invoice. This is called the advance. If the invoice submitted is $1000, and the advance rate is 85%, then the advance would be $850. This is the biggest benefit of factoring for staffing companies because receiving a percentage of the invoice upfront gives staffing companies the opportunity to reinvest into the business. Whether that be new office computers or offering benefits like daily pay.

How factors protect staffing companies from incorrect invoices.

The second part of invoice factoring is the Reserve. This is the amount that is held until the factor receives payment from the customer. The reserve protects both the factor and the staffing company against any invoice discrepancies. All factors handle reserves differently, and OTR automatically releases the reserve on the first of every month.

For example, the reserve mainly comes into play when a staffing company invoice says Jane Doe worked 35 hours, but the client says Jane only worked 30 hours. Because the factor has already provided the staffing company with funds, factors use the reserve to offset any invoice discrepancies instead of asking the staffing company to pay back those funds. Again, the reserve helps to eliminate any invoice difficulties for the staffing company and the factoring company.

How much does factoring cost staffing companies?

The third part of invoice factoring is the factoring rate. This is the amount the factor charges for funding the invoice upfront. All factors handle this differently as well, and OTR takes the rate out upfront when OTR funds the staffing companies on any invoices.

One of the ways factors differ as far as rate is concerned, is that some factors have a tiered rate program and some have a flat rate program. Staffing companies typically prefer a program with a flat rate; flat rate means that the rate never increases no matter how long it takes for a client to pay on the invoice. This gives staffing companies the opportunity to budget down to the penny how much capital is coming in every time they staffing company submits invoices to the factor.

With a tiered rate program, the rate will increase every certain amount of days; some increase daily after an invoice has been outstanding for 30 days, some increase every 15 days after an invoice has been outstanding for 30 days. This can cause problems for staffing companies, because as most people know, most staffing clients never pay within 30 days. When staffing clients do pay, the time it takes for clients to cut the check varies on a month to month basis. With this rate program, a staffing company never knows how much capital they will receive from their invoices, because the factor may increase the rate depending on when the invoice is paid.

Factoring for staffing companies has become a trusted way to eliminate the headache caused by lack of cash flow as larger contracts are signed and more contractors are placed. A staffing company may place just one contractor one week, then have to place 30 the next. Factoring allows staffing companies to keep up with that increased growth, without incurring any debt.

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