Payroll Factoring: Bad Credit is No Problem

If your staffing company needs fast cash flow, and you’ve been following along up to this point, payroll factoring probably sounds pretty attractive right now.

But wait, you say, what if I have bad credit? I’ve had: 

  • Difficulty paying bills on time
  • A business partner who left me in the lurch
  • Personal issues that spilled over into my business 

Can I still qualify for payroll factoring?

Yes you can!

One of the most attractive features of payroll factoring for a staffing company – especially a small company – is that your clients’ creditworthiness is much more important to the factor than yours.

Your clients pay the bills.

When you factor invoices, the payroll financing company purchases the right to be paid for those invoices by your clients. For accounting purposes, you are basically converting your accounts receivable into liquid assets in a shorter timeframe – the factor is buying your clients’ debt.

The factoring relationship will commence with some type of notice that your receivables have been assigned to the factor and that all payments should be made to the factor to satisfy the debt. Because of this, a payroll staffing factor will search your clients’ credit to make two decisions:

  1. Whether to open a credit line for the client – if the client has an established track record of making complete payments that arrive within a reasonable recourse period, the factor will agree to purchase your invoices for that client. If they have concerns, however, they may choose not to factor those invoices.Fortunately, if you have done your homework up to this point then you are already working with clients that are creditworthy. If you are not, then this is the perfect time to reevaluate your contracts and focus on the clients who will build your business rather than sink it.
  2. How much credit to extend to your client – smaller clients will reasonably be given smaller credit limits, as will clients without an extensive payment history or those that the factor finds questionable. Your factor may issue a limit across the board, or they may offer more credit to a larger or more reputable client.The good news about credit lines is that you can approach your factor for an increase if your client establishes a steady payment record.

Your background does matter, though.

While more weight will be given to your clients’ creditworthiness, factors will also consider your financial and personal background before approving you for funding. Understanding your personal situation will increase the factor’s comfort level with your company and starting a factoring relationship.

In order to protect their interests, your factor will file a UCC-1 statement asserting rights to your company’s assets in the case of default. If one or more of your clients fails to pay their invoices within the recourse period, the factor will charge the invoices back to you. The UCC filing allows this, and gives the factor the right to collect any unpaid amounts when your factoring relationship ends.

If you have liens or judgments against you already, however, a factor may not be able to assert first rights to your assets. In such a situation, a factor may seek a subordination agreement from prior creditors in order to proceed.

This isn’t to say that you will automatically be disqualified if your background report isn’t perfect. However, you should inform your potential factor at the beginning of the due diligence process if there are any potential obstacles to finalizing your contract.

The Bottom Line

Just as you set everything in order to start your staffing company, make sure you have everything in order when you pursue a factoring agreement. Your early preparation and candidness will build a foundation of trust and confidence that will keep your payroll factoring relationship strong through its duration.

Factor Finders provides payroll funding support to temporary staffing agencies in a variety of industries. Learn more about our factoring programs for staffing companies.

Read more about Starting a Staffing Company:
How Does Payroll Factoring Work?
How to Choose a Payroll Financing Company
Payroll Financing Means Fast Funding for Staffing Agencies