You own a successful staffing company and have decided to partner with a funding provider. You're ready to sign the contract and look to the future. You can focus on your area of expertise - staffing - and allow another expert to take care of the finances. You can plan for your company's future knowing that you'll have a strong financial partner...
STOP!
Do you know what you're signing? Are you fully informed? What terms are you really committing to?
Before you sign the contract, read it carefully, and then ask for more specific information - or you may be committing to paying more for your funding without even knowing it.
Ask the following questions before committing to a funding provider:
1. What is the real cost?
It is not unusual for providers to combine administrative costs and interest costs as one fee. Some companies will present a lower rate that may appear more attractive, but then they assess miscellaneous fees for administrative or other services. Ask to have all additional fees detailed in the proposal. Don't be caught off-guard by undefined costs for services that you thought were included in one rate.
2. What is the daily interest rate really costing my company?
A daily rate may appear to be the better option - until you calculate what that rate actually is over the course of a longer term, such as a year. A .0833% daily interest rate equates to an annual interest rate of 30%. Are you still comfortable paying that rate?
3. How often will this provider release my gross profits?
Typically, a funding company will advance you 80% to 100% of your receivables. Ask if your advance rate is based on payroll amount or gross invoice amount. The industry average is around 85%. You receive the remaining 15% when your customers pay their invoices. How often will your provider release those funds to you? Will you receive your profits weekly, bi-weekly, monthly, or only when you request them? The longer your provider holds your profit checks, the less interest you'll receive on your money. Your provider will be collecting that interest instead.
4. When will my company receive credit for receivables?
Does the provider have a "clearance" policy? Is your invoice credited when payments are received, or only after a certain "clearance" period? How long is the clearance period before you're credited for the payment? You're paying daily interest on receivables during a clearance period. That additional cost can start to be significant when you consider it is for every receivable your customers submit.
5. What fees should be considered reasonable and under what circumstances are they incurred?
Most providers will assess a common stop-payment fee, which is passed along from the bank issuing the stop payment on the check. Is there any additional fee to process a stop payment from your provider? Also, find out if there is any mark-up to the credit card fees that will be passed along to you. Some companies will assess additional charge-back processing fees on the normal daily interest an invoice may incur. You need to be informed about any other fees that are not specifically outlined in your proposal.
6. Under what conditions can I terminate my contract?
If you find your relationship with your funding provider is not working for you, make sure you are clear on how you can end that relationship. The time to do that is before you sign the contract. Twelve-month to 24-month contracts are the norm, and many contract agreements auto-renew - make sure you know for how long. The standard auto-renewal term is one year. If your provider expects a three- to five-year renewal, ask yourself if you want to be held hostage to that timeframe.
7. What is the required lead-time for non-renewal notification?
Are you expected to pay all outstanding balances, (i.e. funded invoices) in full, on the day the termination notice is given, or is there a reasonable timeframe provided? Few staffing companies are in a position to accommodate immediate payoff of receivables. That condition can make it very difficult to ever leave that funding provider. Read this area of the contract carefully. You may be signing on for a longer term than what you're anticipating.
When you find the right funding provider, your staffing company can reap the benefits of a strong financial partner who can help position your company for growth. A good funding provider can help you navigate all the funding choices available to you, and help you select the best options for your business. By arming yourself with the right questions, you can ensure that the partnership you're forging is a strong and lasting one.
Julie-Ann Blazei is the President of Tricom Funding and a fifteen-year veteran of the staffing industry. She can be contacted at 866.883.5389, or by email at jblazei@tricom.com.
