Staffing agencies borrow against their receivables, almost always on an asset-based line. The lender advances typically 80% to 90% of eligible invoices, caps any one customer at commonly 20% to 25% of the eligible pool, and drops invoices more than 90 days past invoice date. There is no inventory to lean on, so the line depends on two things: clean, well-spread receivables, and payroll taxes paid on time. An unpaid payroll tax liability can put the government ahead of the lender, and most lenders will not advance until it is resolved. Expect weekly reporting and collections through a lender-controlled account.
- Collateral
- Receivables; no inventory and few hard assets
- Advance rate
- Typically 80% to 90% of eligible receivables
- Single-customer cap
- Commonly 20% to 25% of eligible receivables
- Usually ineligible
- Unbilled hours, invoices over 90 days, permanent-placement fees still under guarantee
- What lenders check first
- Payroll tax deposits and filings, current and complete
- Reporting
- Weekly borrowing base and aging; lockbox collections
Why a growing agency runs short of cash
Staffing is the purest working capital business there is. The agency's main cost, wages plus employer payroll taxes and workers' compensation, goes out every week, on time, without exception. Its revenue comes in when the customer's accounts payable department gets to the invoice, usually a month or two later. Nothing in between can be sold or pledged except the invoice itself.
That makes the agency's cash need a direct function of growth. Every new account and every added worker means more payroll funded before the first dollar of billing is collected. A profitable agency that doubles its placements in a year can run out of cash faster than a flat one losing money, which is why lenders to this industry care less about the size of last year's profit than about how the receivables behave.
The line of credit exists to carry the receivables. It should not carry losses, owner distributions or a permanent shortfall; a line doing those jobs eventually shows up as a borrowing base that no longer covers the balance. For the general method, see how lenders size a working capital line.
The spread between bill rate and advance rate
The most useful arithmetic for a staffing owner is simple. Each week's invoice supports a borrowing of the invoice amount times the advance rate. Each week's payroll costs what it costs. If the first number is larger than the second, the line funds payroll by itself once invoices are out. If it is smaller, the agency tops up every payroll from its own cash, and the gap compounds as the business grows.
| Invoice per 100 of payroll cost | Borrowing at an 80% advance | Borrowing at a 90% advance | Does the line cover payroll? |
|---|---|---|---|
| 115 (thin markup, such as light industrial) | 92 | 103.5 | Not at the lower advance rate; the agency funds the difference each week |
| 125 | 100 | 112.5 | Just, at the lower rate; nothing left for overhead |
| 140 | 112 | 126 | Yes, with room for overhead and slow payers |
| 160 (professional or IT placements) | 128 | 144 | Yes, comfortably |
Two things follow. First, the advance rate matters more to a thin-markup agency than the interest rate does: a few points of advance can decide whether payroll is self-funding. Second, the line never covers the first week of a new account. Hours worked are not a receivable until the timesheet is approved and the invoice goes out, so the first payroll on every new contract comes from the agency's own cash. Lenders call that the unbilled gap, and an agency adding accounts quickly needs equity or retained cash to cover it.
Before comparing interest rates, compare what each lender's advance rate and eligibility rules do to your weekly payroll.
What counts in a staffing borrowing base
The general rules are in eligible vs ineligible receivables. Staffing has several receivable types of its own, and lenders treat each one differently.
| Receivable | Typical treatment | Why |
|---|---|---|
| Invoiced hours, approved timesheets, within terms | Eligible | The core of the base: work done, accepted and billed |
| Invoices more than 90 days past invoice | Ineligible | Old staffing invoices usually mean a dispute or a customer in trouble |
| Hours worked but not yet invoiced | Usually ineligible; some lenders allow a small, short-lived amount | No invoice, no approval, nothing the customer has acknowledged |
| Permanent-placement fees | Often ineligible while the replacement or refund guarantee runs | The fee can be reversed if the candidate leaves |
| Invoices paid through a managed service or vendor management program | Eligible, usually net of the program fee | The program deducts its fee before paying, which lenders treat as dilution |
| A customer above the concentration cap | Excess over the cap is ineligible | One failure should not sink the base |
| A customer with too much past due | All of that customer's invoices can be excluded | The cross-aging rule, explained in the glossary |
| Government customers | Eligible only with extra documentation and steps | Collecting from a public payer on the lender's behalf has its own rules |
Credits and rebills are the quiet problem. When a customer disputes hours, the agency often issues a credit memo and rebills. To the lender, every credit is dilution: invoice value that never turned into cash. An agency with sloppy timekeeping can have a respectable-looking aging and still get a lower advance rate because its dilution is high.
Payroll taxes come before everything
Every lender to a staffing agency asks the same first question: are the payroll taxes paid? Withheld income tax and the employee share of payroll taxes are held in trust for the government. When an agency falls behind, the liability can become a federal tax lien that competes with the lender's claim on receivables, and the owners can be held personally responsible for the trust portion.
Lenders protect themselves in three ways. Before closing, they ask for payroll tax filings and proof of deposits and check them against payroll registers. After closing, they ask for proof with each reporting period, sometimes from the payroll provider directly. And where anything is in arrears or under a payment plan, they hold an availability reserve for the amount, or decline. An agency behind on payroll taxes should read refinancing with unpaid payroll taxes before approaching anyone.
Workers' compensation raises a related issue. Agencies on large-deductible or self-insured programs are often required to post collateral for the insurer, commonly a letter of credit. That can be issued under the line as a sublimit, but every letter issued reduces availability one for one. See letters of credit under a line.
Concentration, where staffing gets hurt most
Agencies grow by landing big accounts, so many carry one or two customers that make up a large share of receivables. Borrowing bases commonly cap any single customer at 20% to 25% of eligible receivables, and the excess drops out of the base.
Take an agency with 3,000 of eligible receivables, of which one customer owes 1,200. At a cap of 25%, that customer counts for 750; the other 450 is excluded. Eligible receivables fall to 2,550, and at an advance of 85 on every 100 the agency can borrow about 2,170 instead of the 2,550 it expected. The biggest, best-paying customer is the reason the line feels small.
Some lenders will set a higher cap for a customer with strong credit, and the cap is worth negotiating at the start rather than after the account has grown. More on how lenders think about this in customer concentration and debt and the concentration limit entry.
Factoring, or a line
Many agencies start with factoring: the factor buys invoices, checks customer credit and often collects. It is available early, before the agency has the financial statements or the size a line lender wants. The cost is higher, and customers are usually told to pay the factor.
A line becomes realistic once the agency has accrual financial statements, a clean aging, payroll taxes that are provably current and enough volume to support the reporting. Moving over means the factor is paid off, its lien released and customers redirected to pay the new lender, all timed around a payroll. The steps are in moving from factoring to a line of credit, and the trade-offs in factoring vs asset-based lending. Transparent's lender book includes 235 lenders that write asset-based loans and lines and 116 that write factoring, so an agency is placed where its file fits.
Covenants and reporting
Staffing lines are reported more often than most, because the collateral turns over every few weeks. A typical package:
- A weekly borrowing base certificate, with invoices, collections and credits for the week, and an aging by customer at least monthly.
- Payroll tax evidence each period, as above.
- Collections into a lender-controlled account. Customers pay a lockbox or a controlled deposit account; see cash dominion and lockboxes.
- Monthly financial statements and a compliance certificate.
- A fixed charge coverage covenant, tested at all times on some bank lines and only when availability runs low on many non-bank lines. The level is negotiated.
- Field exams before closing and periodically after, which test invoices against timesheets and collections.
The general covenant menu is in the covenants on a line of credit.
What trips staffing agencies up
- Payroll taxes paid late, even once. A single missed deposit in the past year raises questions a lender will want answered in writing.
- Merchant cash advances. Advances take daily payments and file liens on the same receivables a line lender needs. They have to be paid off at closing; see refinancing cash advances for staffing agencies.
- Growth faster than the base. Each new account costs a week or more of unfunded payroll, and a thin-markup book may never self-fund.
- Timesheet discipline. Late approvals leave hours unbilled and unborrowable; disputed hours become credits and dilution.
- Worker classification. Treating employees as contractors creates a payroll tax exposure that a field exam can find.
- Related-party arrangements, such as an affiliated payroll company or a sister agency sharing customers, which lenders will want separated or included in the borrower group.
Preparing the file
What a line lender asks for, from Transparent's checklist: an AR aging by customer with days outstanding; an AP aging; the balance sheet and P&L; a year-to-date P&L through last month-end; a debt schedule showing existing liens; and, where available, bank statements and two to three years of business tax returns. Lenders to staffing agencies also ask for payroll tax filings with proof of deposit, the workers' compensation policy and any collateral posted for it, and the largest customer contracts.
Once the documents are in, Transparent builds the lender package — financing model, lender presentation, blind teaser and underwriting memo — in a day, and charges nothing before a loan closes. Agencies being bought rather than borrowed for are covered in financing a staffing agency acquisition.
Common questions
- Can a new staffing agency get a line of credit?
- Usually not from a bank until it has a track record: accrual financial statements covering at least a full year and payroll taxes provably paid on time. Early-stage agencies typically start with factoring, which leans on the customers' credit more than the agency's, and move to a line as volume and records build.
- Will a lender advance against hours my workers have worked but I have not invoiced?
- Most will not, or only a small amount for a short time. The hours become a receivable when the timesheet is approved and the invoice goes out. The fastest way to borrow more is often to invoice sooner.
- Why is my line smaller than my receivables suggest?
- Usually concentration, aging or dilution. Any customer above the cap, commonly 20% to 25% of eligible receivables, drops out above the cap; invoices over 90 days drop out entirely; and a high level of credits and rebills can lower the advance rate itself.
- I am on a payment plan with the IRS. Can I still get a line?
- Sometimes. It depends on the size of the balance, whether a lien has been filed and whether the plan is current. Lenders who proceed will usually reserve for the unpaid amount, which reduces availability, and some will require it paid off at closing.
- Do I have to personally guarantee a staffing line?
- Owners of private agencies are usually asked to. Asset-based lenders sometimes accept a limited or validity guarantee, which covers fraud and misreported collateral rather than the whole debt. See personal guarantees on a line of credit.