Starting a Staffing Agency

suzanne4, RN · Dec 2, 2005

Not sure where you are located, but I would check with some other sources before using a funding company and spreading yourself too thin.

Have you actually worked agency in the past? Were you planning on working as one of your nurses? That may one of your best ways to market your company to start off. The issues that you will have in getting employees, is that you won't have an established track record otherwise, and most will be scared to sign on. If you set up your agency, and work there as an employee, then you will have established a banking relationship as a company, etc. To go and just try to hire employees right off the bat would be suicide for you.

Kindhearted · Dec 2, 2005

I am in Texas. I've worked for a home healthcare agency before but that's been years ago. So you suggest that I work myself for the company first? I don't plan to actually be up and running until next year. I'm in the planning stage. How long does it normally take for someone in the start up phase of staffing to be able to see a profit and hire employees.

eddy · Dec 2, 2005

As I understand it you are asking about the practice selling your invoices (aka factoring).

In my opinion as an accounting professional it is a terrible thing to do. It is kind of like racking up a big balance on a credit card and then paying the minimum. You're in a trap that you created for yourself. In the case of factoring, interest charges and fees right off the top suck out most or all of the profit making it almost impossible to ever STOP using a factoring company. Your company might even become "successfull" but you'll still be broke.

If you are not able to get the funding in a more conventional manner by presenting your business plan to potential investors and/or lending institutions and acquiring a true loan or angel/venture capital, I would say you need to continue developing your plan and gaining industry specific experience.

The other route is to do as Suzanne has suggested, working as a one person agency until you have built up a large enough pile of cash to fund your first employee, at which time lots of other expenses begin to come into play.

HarryHK · Dec 4, 2005

As I understand it you are asking about the practice selling your invoices (aka factoring).
In my opinion as an accounting professional it is a terrible thing to do. It is kind of like racking up a big balance on a credit card and then paying the minimum. You're in a trap that you created for yourself. In the case of factoring, interest charges and fees right off the top suck out most or all of the profit making it almost impossible to ever STOP using a factoring company. Your company might even become "successfull" but you'll still be broke.
If you are not able to get the funding in a more conventional manner by presenting your business plan to potential investors and/or lending institutions and acquiring a true loan or angel/venture capital, I would say you need to continue developing your plan and gaining industry specific experience.
The other route is to do as Suzanne has suggested, working as a one person agency until you have built up a large enough pile of cash to fund your first employee, at which time lots of other expenses begin to come into play.

Having a factor is pretty standard for most small agencies. There is virtually no way to accumulate enough cash to pay the 10 travelers or per diem staff you need to have a full time agency and support yourself. The real lag in payment is closer to 45 days and in the case of travel, you have large first day expenses in the form of housing.

Sure, you might be able to find venture capital, but this would cost you more than the 3 to 6 percent that a factor would cost you. And as I understand the process, the factor pays the agency the entire amount (less the percentage) and receives the billing directly. This allows the agency to meet the payroll, and meet office overhead as well.

However Eddy is right in that a factor is a huge cost (hidden from most nurses) that is part of the agency overhead. If you can afford the delay in revenue, contracting yourself out gives you an immediate 3 to 6 percent advantage over most other agencies (very large ones pay less for financing). Other advantages to contracting yourself out is the savings on worker's comp and unemployment insurance (that you do not have to pay in most states as a self employed person). Regular agencies are required to pay this for all employees - another cost advantage while you are gearing up for hiring others.

Suzanne is right that you can save enough to meet one employee's payroll but it is a long road to a full fledged agency. If you think about 10 nurses making $30 an hour (for example), with SSI and other payroll taxes, you are talking about $14,000 a week out of pocket times perhaps 6 weeks. And many hospitals do not pay on time. My current contract is only paying invoices every 6 weeks! (Which means they are about 30 days late on half the outstanding invoices).

eddy · Dec 5, 2005

Good points. I only disagree with you on the percentage (cost wise of factoring) and the number of agencies doing it.

Factoring works like this. You sell your invoices to a company at a discount. Generally, that discount is around 7-12%. However, the factoring company will also keep a "hold back". This usually comes out to another 10% or so. The hold back money is used to pay INTEREST on your customers that are past due in paying the factoring company. This is often set at 45 days, though 30 to 60 days is also seen (typically depends on the industry the factoring company serves and what is customary or expected). Now, if your customers pay AFTER the "due date" you begin to lose some of your hold back. This is often a fairly high interest rate and sometimes a standard late fee in addition. It only takes maybe 10 days past due to wipe out the "hold back". HOWEVER, you STILL continue to pay, you just lose hold back money from your other invoices you've sold. Also, it is customary for the factoring companies to have forced buy back clauses in their service agreements. This is merely a method of forcing you to BUY BACK the invoices that become too delinquent (often uncollectable).

From doing the math myself, a typical agency should expect about 10-15% profits BEFORE interest and taxes. Now, can you see the problem? Unless your customers pay very promptly your entire profit margin can get eaten up. However, to continue operating you have to keep dumping your invoices into factoring. It's a trap.

HarryHK · Dec 5, 2005

The figure for factor costs that I have heard several times in the past three years is 6%. I recently spoke to a small agency owner and he told me that he has a 3% deal currently. I don't have first hand information but I know that the rates you quote are simply impossible in the travel nurse industry. Most agencies work on a 20 to 30 percent gross profit margin after paying all direct nurse costs (payroll, taxes, housing etc - but not overhead such as office costs and marketing), paying a third of that or more would result in a quick bankruptcy (which does happen fairly often anyway). Heck, 3 to 6 percent is quite a bite!

Is is possible the 7 to 12% you quote plus late penalties is for a different industry? In general, most hospitals are good payers (if sometimes slow) and low risk. As far as late fees goes, I know nothing about what a factor might charge, but I would hope the standard 1% per month on late balances found in every facility contract I've read or submitted would be enough to cover that part.

I also don't know how many agencies use a factor, but I'll bet it is the vast majority. Seems to me only a publicly held company might be able to float their own payroll. I don't think there are more than 10 of those in the trav biz. And some 300 agencies altogether. A successful midsize company might have 100 nurses out on contract at one time. That is close to $250,000 gross revenue a month. Multiply that by 6 weeks until receipts match invoices, and you have to be very well capitalized to meet payroll without a factor.

HarryHK · Dec 5, 2005

Reading the original post again, he/she looks like they are starting a home health agency. I'm going to guess that the costs for startup will be much higher than for a hospital staffing company (which is where my expertise such as it is lies). Lots of extra regulation, and third party billing. No fun.

Kindhearted will need a solid business plan and even so the financing costs are likely going to be high. I wouldn't be surprised if it was in the range you are quoting.

eddy · Dec 5, 2005

Honestly, I read the original post to be a local PRN type staffing agency. I could be wrong, but that's at least how it struck me.

In any event, Harry, I agree with you that it can be terribly difficult to fund even a small staffing or travel staffing venture. However, there are some pretty attractive loan programs and credit lines available by using an SBA guaranty that I feel would be much more appropriate, inexpensive and predictable. Granted, getting an SBA loan requires a great deal of preparation and TIME, but it is all stuff you should really do anyway in the planning stages of a new business.

Factoring is like using high rate credit cards for funding. Sure, you can do it, and maybe even make it. Most don't.

My own previous profession (prior to nursing) was that of an Accountant and small accounting and consulting firm (20 people) owner. In my time I have seen a lot of financials. Small companies with limited cash absorbing factoring expenses were often in serious financial ruin they just didn't know it yet. Due to the nature of factoring you will appear to have enough operating capital, yet you are bleeding cash at an astounding rate. It's just easy not to see it because you have cash in your accounts, albeit not much.

Factoring can be a useful instrument for cash flowing a high margin project, but something as typically low margin as a staffing agency can't afford to absorb those kinds of costs. Likely the reason why we see so many agencies popping up all the time is due to the lure of easy cash flowing via factoring. Likely the reason why the total number of profitable agencies stays relatively stagnant is due to the same. Profitable agencies fund their own payroll, at least in large part, and use low rate lines of credit backed by assets for temporarily funding unexpected sales growth, enjoying a competitive advantage that fledgling companies using factoring as their sole funding source generally can't make up for.

Honestly, your numbers are equally as dismal as mine. Let's use a 5% discount for example. If you are selling your invoices at a 5% discount and the customers pay at 30 days incuring no additional fees or penalties and you average $250k per month in A/R (sales) for an entire year, what is your interest expense (APR) on that money? It might surprise you. :)

HarryHK · Dec 6, 2005

I think you are right about the local staffing thing. However, I don't think it matters what the APR might be. It is just a fixed five percent cost. Which in the staffing business where you know exactly what your cost of doing business is, is the best way to do it. Not cheap, and in many other sort of business models that are unprofitable for the first couple of years, factoring could easily help push the business into bankruptcy.

Lines of credit seem to be just as expensive, perhaps not APR wise, but not a clean fixed percentage of the cost of doing business either. And I suspect you have to have pretty darn good financials to get one as well, or put a lien on your property. A contract with a guaranteed return in a staffing agency should be easy to factor.

Since I have effectively started a staffing agency with myself as sole employee, I know it can be done with virtually no money other than living expenses before invoices are paid. And I've subcontracted travelers who were willing to wait for their money as well. But a home health agency is scary stuff. I'd want lots of capital and some back office expertise as well.

eddy · Dec 6, 2005

I think you are right about the local staffing thing. However, I don't think it matters what the APR might be. It is just a fixed five percent cost. Which in the staffing business where you know exactly what your cost of doing business is, is the best way to do it. Not cheap, and in many other sort of business models that are unprofitable for the first couple of years, factoring could easily help push the business into bankruptcy.

The APR does matter, especially in terms of your next comment on how you feel a line of credit seems to be just as expensive. From the idea of a fixed 5% on every billed shift/manhour, you are right, it is budgetable. However, if you are attempting to offer benefits and a high wage competetive with other agencies, you are going to be cramped. Since you later talk about being an IC and subcontracting business out this reveals another very important thing. Factoring is still bad for someone in your position (in my opinion) but it's really terrible for someone seeking to EMPLOY people.

Lines of credit seem to be just as expensive, perhaps not APR wise, but not a clean fixed percentage of the cost of doing business either. And I suspect you have to have pretty darn good financials to get one as well, or put a lien on your property. A contract with a guaranteed return in a staffing agency should be easy to factor.

Transactional budgeting can get you into trouble. It neglects the expenses required to support operations (overhead costs and the like) and the increasing burden that interest expenses have on a company when factoring. Additionally, and probably most importantly, when you borrow from your line of credit you pay it back as soon as you get the money in. In the previous example we discussed about APR on factoring let's see.... You are bleeding out 5% of your revenue on a constant basis using factoring, 5% no matter when someone pays... unless they run past 90 days or so when you are forced to buy back the invoice and are potentially financially ruined. With a line you pay generally 6-10% APR. Since you are borrowing money on an invoice for 30 days, how much does it then cost you in comparison?

Since I have effectively started a staffing agency with myself as sole employee, I know it can be done with virtually no money other than living expenses before invoices are paid. And I've subcontracted travelers who were willing to wait for their money as well. But a home health agency is scary stuff. I'd want lots of capital and some back office expertise as well.

What you have done is not a travel staffing or staffing agency. You have become an independent contractor and have allowed other IC's to subcontract through your existing contracts/service agreements. That is not the same thing as a travel staffing or staffing agency who offers benefits and pays payroll taxes. What the OP appears to want to do is have employees working for her in a local Per diem staffing agency. She would have to pay expenses like work comp insurance, unemployment insurance, Liability Insurance (both professional and general), payroll taxes, etc. etc. (in other words, a bunch of stuff that costs a lot of money).

This unfortunately further removes factoring as a viable option for her business. While your margins are fairly high due to having only a couple of costs (by treating your people as IC's), a real employer has significant additional costs and can't afford to give away 5% off the top of their A/R each week.

Kindhearted · Dec 7, 2005

Hello again,

I've been away for a while. Thanks for all of your input. Eye openers I might add. Just to clarify-I am starting a local (hospital) staffing agency, no home healthcare, no travel nursing. I was looking into PRN funding company but I wasn't really sure how the factoring program worked so far as if the accounts became way past due. I know that they take 1% from the total balance and give up to 80% cash advances on your total balance with the hospital. I didn't know that they could make you buy your invoices back if they deem it to be too difficult to collect the money. I guess I understand why though.