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How Invoice Factoring Helped a Staffing Agency Avoid Debt Default

 

How Invoice Factoring Saved Our Staffing Agency from Default

As the owner of a small staffing agency in Chicago, I was thrilled when we landed a large contract with a major hospital system in 2019. Our agency was tasked with providing nurses and medical assistants to staff several clinics and testing centers across the city.

The contract was a game-changer – prior to that, we had been struggling to generate consistent revenue. The new business allowed us to hire additional recruiters and triple our pool of healthcare professionals. For the first time in years, the future was looking bright.

However, the contract came with a catch – the hospital system had 90-day payment terms. That meant we had to front 3 months worth of payroll and expenses before we would receive any actual income from the work we were doing.

The Cash Flow Crunch

At first, covering costs wasn’t an issue. We had some cash reserves built up that we used to float expenses while we waited for payments. But as weeks turned into months, our reserves began to dwindle at an alarming rate.

We were burning through cash covering:

  • Payroll for nurses and other contracted healthcare professionals
  • Payroll taxes and workers compensation insurance
  • Licensing fees and background checks
  • Healthcare and benefits for internal staff
  • Office space, utilities, phone/internet
  • Accounting and legal fees

Within 6 months, we had exhausted our reserves. The hospital system was thrilled with our services – we were reliably providing qualified nurses and support staff to over a dozen facilities. But although the invoices kept piling up, actual payments were still 60+ days out.

I realized we were on the brink of disaster. We had incurred almost $1.5 million in expenses that were outstanding. I was using credit cards and lines of credit to make ends meet, but within a month or two, I would no longer be able to cover payroll or critical operating costs.

Exploring Financing Options

I urgently needed working capital to bridge the gap between when we incurred expenses and when payments materialized. I initially looked into some more traditional financing options:

  • Bank Loans: Because our agency was still relatively new and had inconsistent historical revenue, we didn’t qualify for a conventional small business loan or line of credit.
  • Merchant Cash Advance: This option provides quick access to capital in exchange for a percentage of future credit card sales. But since most of our customers paid via check or wire rather than credit card, an MCA wasn’t feasible.
  • SBA Loans: While these government-backed loans offer attractive long-term financing, the application process is extremely rigorous. I was concerned we wouldn’t be approved quickly enough to solve our immediate cash crisis.

As I desperately searched for a solution, I came across business financing companies that offered something called invoice factoring. Essentially it worked like this:

  • We would sell our outstanding invoices to a factoring company at a small discount
  • The company would then advance us a large portion (70-90%) of the invoice amounts within days
  • They would handle collecting payments directly from our customers when invoices became due

Factoring provided money faster than any other option I explored. And unlike a loan or credit line, we weren’t taking on debt or accruing interest charges. The factoring fees were reasonable for the flexibility and speed this option afforded us.

Most importantly, invoice factoring gave us the working capital we desperately needed to keep our agency afloat.

Saving Our Staffing Agency from Default

I ultimately decided to move forward with a factoring agreement with BlueVine, a company that specialized in flexible credit solutions for small businesses. The application process took less than a week, and within 14 days of submitting our first batch of invoices, we had over $800k in our bank account.

This immediate cash infusion literally saved our staffing agency from going under. With the advanced funds, I was able to:

  • Catch up on back-payments to nurses and contractors
  • Pay staff and operating expenses on time
  • Renegotiate payment terms with critical vendors

Over the next 4 months, BlueVine advanced us over $3 million as we continued submitting invoices. As our customers paid off those invoices 90 days later, BlueVine used the funds to pay themselves back for the advances plus their fees.

In the end, the total cost of factoring with BlueVine was less than 2% of the invoices – extremely reasonable given the crisis it allowed us to avert.

Lessons Learned

After this experience, I now recognize the importance of maintaining access to working capital, even during periods of rapid growth. Waiting 90+ days for customer payments might work for well-established enterprises, but it can cripple small businesses without substantial cash reserves.

Invoice factoring isn’t necessarily the cheapest form of financing. But for flexibility, speed, and ease of qualification – especially for newer companies like ours – it’s an invaluable resource.

Had we not started factoring invoices when we did, we surely would have defaulted on payroll and critical obligations. Our staffing agency survived thanks to alternative financing solutions like factoring – it’s now a core component of our ongoing cash management strategy.

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