A Growth Mindset
Written By: Chad Eberly, General Manager and Co-founder of Encore Funding
A recurring theme we are seeing and will talk about throughout is how staffing agencies are focused on growth. They believe the recent downturn in demand and invoice size is starting to slow, and buyers have work that needs to get done. Optimism is high among staffing entrepreneurs, even in the face of a period of 18 months of decline in temporary staffing placements. We are seeing a steady flow of startups looking for financing. We are seeing tenured staffing agencies looking to acquire other businesses that are ripe for takeover. We aren’t, however, seeing many clients looking to sell, choosing instead to weather the downturn, implement creative growth strategies, and align with the right partners to strengthen their balance sheet and capture market share. It is this focus on growth that has staffing entrepreneurs strengthening their business and teaming with the right partners. This should excite factors who support the staffing and contract labor sectors.
Elaborating on the environment we’re currently seeing, we have nurse staffing clients looking to acquire businesses in other states to obtain the appropriate licensing and expertise to break into new marketplaces. We have education staffing clients looking to build upon their winning formula and expand their footprint into other, adjacent regions. We are also seeing a big push from light industrial and food services staffing agencies to follow big, national clients into different markets, letting that event be the catalyst that supports a foothold in a new city. The above concepts reflect the optimism amongst staffing entrepreneurs, but also a bit of a necessity as agencies look to harvest margin in new areas.
Challenges in California
One of the biggest staffing industries feeling the need to diversify its footprint in order to improve margins is the California light industrial (“LI”) market. This will come as no surprise to factors supporting the CA LI contingent, but the combination of low pricing and the high cost of workers comp insurance has squeezed CA LI agencies tremendously. This is driving CA based agencies to branch out into other states with less competition and more favorable workers comp rates. Part of the problem is that the buyers of CA LI staffing labor are so focused on paying the least amount possible. When service and continuity mean almost nothing compared to rates for buyers, and there is always another staffing agency ready to take the chance and do the work for less to capture revenue, CA LI agencies are going to be looking to branch out, and factors can help their clients navigate this expansion.
Navigating the Healthcare Landscape
Another staffing vertical that has been hit hard recently is the nursing industry. The trouble first started for the agencies placing nurses at the long-term care facilities. Those long-term care facilities have historically suffered from poor cash flow and trade hands regularly. Once the post-covid government support funds dried up in fall 2022, the nurse staffing agencies focused on long-term care facilities got hit hard with slower payments and even bad debts.
As time went on and hospital systems and other healthcare facilities could no longer afford the inflated rates for nurses generated by the pandemic, the nurse staffing industry saw a significant correction in rates and volume. As a result, there has been a large double-digit year-over-year decline in travel nurse and per diem nurse staffing. Locum tenens and allied care staffing, two high growth areas of healthcare recently, didn’t see the same reduction in demand, but they did experience a slowdown in growth.
We are seeing the downturn in the healthcare staffing space across the board, and we’ve been seeing it for many months now. The businesses that had overextended themselves, pulled excess cash out of their company, or who did not cut costs quickly enough in parallel with the pullback in volume are having to make some hard decisions and drastic changes to the composition of their business.
There are a few bright spots in the healthcare staffing space, however. Home healthcare and locum tenens are still solid and growing. Those two disciplines require their fair share of knowledge and expertise, just like any other healthcare staffing operation, so if you’d been in it or gotten into those areas at the right time, that has helped prop up some agencies as other parts of their healthcare staffing business has struggled. While many healthcare staffing markets have had a hard past 18 months, the decline is slowing down, and the slide is projected to come to an end soon. We are seeing an uptick in healthcare staffing volume. We are still seeing entrepreneurs launch nurse staffing agencies. And factors with experience in the space, or an interest in the healthcare staffing space, should continue to support focused, hardworking entrepreneurs looking to start healthcare staffing businesses that can land contracts with reliable paying debtors.
Factoring – A Perfect Fit for the Staffing Industry
The overall staffing market in 2023 was down 15% year-over-year, and the projected drop for 2024 is 3% according to Staffing Industry Analysts (“SIA”), a leading research and advisory firm focused on the staffing industry. That big drop in 2023 was largely attributable to the normalizing of business following the huge boom in volume during the pandemic. The numbers for 2024 show that there is still some rightsizing in many staffing verticals, but SIA is expecting volume to pick up in 2025, anticipating a 3% increase in overall market size.
Staffing is traditionally a durable industry and weathers downturns better than many businesses. While there has been a significant right size in the market over the past 2 years, there is a lot the staffing industry can look forward to. There is also a lot that factors can do for staffing agencies, during times of good and bad economic conditions, that can help staffing agencies tremendously and therefore make for a terrific long-term factoring client.
Many staffing agencies run on tight margins, and that coupled with their high external employee payroll costs can leave them tight on cash. If a staffing agency also has to wait 45 or more days to get paid, then that places further strain on the agency’s cash position and their ability to self-fund, or even make do with a tight traditional financing arrangement.
Staffing agencies typically must pay their employees weekly. Some agencies that focus on higher skilled positions may be able to run payroll bi-weekly, but largely we see agencies needing to pay weekly, and have invoices to sell on a weekly basis to help cover payroll costs. Our portfolio covers every kind of staffing skillset out there, and we find that on average the portfolio turns in 42 days. This means a lot of agencies are waiting a while to get paid, and for agencies in the healthcare, IT, and professional services spaces, they may wait much longer to get paid by some clients. As we all know, working with a factor allows for effective cash flow management, which helps an agency meet its payroll obligations, cover operational expenses, and can even leave some cash leftover to invest in growth opportunities.
A couple of ways factors can offer even further cash flow benefits to staffing agencies is by offering credit checking and credit monitoring of debtors. An experienced credit department at a factor can help less experienced staffing entrepreneurs avoid working with poor paying debtors, or debtors who have a history of bouncing between labor providers and not paying the full amount owed. Many staffing agencies don’t have access to the same credit tools that we factors do, nor do they have the experienced credit folks to watch for nuanced signs of deteriorating credit. This means that factors who perform ongoing monitoring of credit for existing debtors, and early detection of declining credit, can really help an agency mitigate exposure and ultimately costly bad debts.
One more way factors can demonstrate value to staffing clients, compared to lenders who do not operate on an invoice-by-invoice basis, is by supporting collections efforts and simplifying cash application. Factors can be an extra set of hands to assist with all or part of the collections efforts for clients, allowing agencies to stay focused on their more valuable core business activities rather than chasing payments. The huge rise in staffing business flowing through MSPs, and sometimes also VMS portals, means that there can be specific knowledge needed to get invoices submitted correctly and paid. Also, we recognize the importance of maintaining a clean aging, and we always talk to our clients about how once payment is received in an MSP/VMS deal, it can take further localized knowledge to appropriately apply those payments, knowledge that factors have acquired over the years and can help train clients on, delivering further value to the factoring relationship.
There are several reasons why factoring is better suited for the staffing industry compared to other finance options. One of the simplest ways to sell our fantastic product is to point out the flexibility during times of growth stemming from how factoring facilities can grow in line with sales, and not just the existence of something like tangible assets. As the client grows and adds on more creditworthy accounts receivable, so does the available funding, offering a tremendously scalable solution that allows clients to take advantage of opportunities in front of them.
Another benefit to staffing agencies is how fast our factoring facilities can be set up and how quickly clients can have funding. With so much of the risk of payment being shifted from the borrower to the debtors, and with factors almost always taking domain of cash, the ways by which a factor can mitigate risk can be so thorough that it allows a factor to move incredibly quickly to put a program in place for a client, who sometimes may qualify for traditional bank financing, but might not be able to afford to wait weeks or months to get that traditional financing in place.
Together with the previously mentioned benefit around speed is the friendliness of qualification that factors can offer to staffing agencies. This again largely has to do with the mechanics of a factoring arrangement, as governed by our factoring and security agreements. While many lenders require extensive credit history and collateral, factoring relies so much more on the creditworthiness of the staffing agency’s clients, making factoring much more accessible to newer or smaller companies that may not meet stringent bank or other lender requirements.
About Chad Eberly
Chad Eberly has spent over a decade overseeing business operations and is a big proponent of leveraging factoring programs to free up working capital for entrepreneurs. Prior to Encore, he served as the Manager of Risk Assurance at PwC, auditing and advising clients on business process and IT controls. His creative and solution-oriented approach to factoring has helped to establish true partnerships throughout his network. As a member of the NEXGEN committee, Chad is perfectly positioned to help educate the next generation of professionals on the factoring industry. Chad can be reached at ceberly@encore-funding.com.
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.
