A staffing agency is like a search business, a recruitment company, or a temp agency (short for a “temporary” agency). Its primary objective is to fulfill the staffing requirements of businesses and to make appropriate matches between open positions and employees for those positions.
Staffing agencies find potential candidates for companies who are looking to fill certain vacancies in their workforce. They provide assistance to businesses in the recruitment process for a variety of positions, including the following:
- Temporary Employees: An assignment that has a specified beginning and ending date.
- Temp to Hire Employees: An assignment that starts off temporary but is used by employers to help determine whether the temporary worker could be a long-term fit for the position.
- Direct hire: A permanent position in which an employee is recruited by the staffing agency but hired full-time by the client (different than temporary and temp to hire employees).
The core benefit of a staffing agency is that clients are able to save time and money by working with them. They provide a wealth of resources that their clients may not have access to or the resources or funds to build out such as a comprehensive HR department that can handle a high volume of employees and the time burdens associated with recruiting.
On the other side, workers are able to generate certain benefits by working with staffing agencies. Oftentimes their schedules are more flexible, work can be more consistent and less cyclical (if one employer no longer needs them they can be placed with another), and they can gain exposure to a wide array of different skill sets as they are placed with different clients. They may be able to use these opportunities to acquire employment that is full-time or permanent as well if they so desire.
How Can a Staffing Company Make Profit?
An employment agency that specializes in temporary staffing delivers workers to companies and organizations that are in need of new personnel. They make money by charging their clients a premium on the wages that they pay their employees. For example, if a staffing agency pays $18/hr for an employee with a specific skill set, they may charge their clients (where this employee actually performs a job) a premium of 30% to have the employee work for them. In this case, the client would be paying around $23/hr for the employee’s time.
Profits fluctuate widely and are contingent on a wide range of criteria, including the number of personnel, the industry or sector, the demand, the location, fixed and administrative costs of the agency, and more.
In some circumstances, individuals pay a predetermined amount for the services that are performed for them. Until the needed post is properly filled, temp agencies have the option of working on a “retainer basis” and charging a monthly fee to their clients.
How to Get Your Own Staffing Agency Started
Getting started requires some careful planning and a strong business model. Staffing agencies are not one of the easier small businesses to run, as there are a lot of moving components between having to have employees on staff, having to have clients for them to work for, and maintaining the right balance so that you have enough employees to service all your clients but not too many. As part of this, you will want to start by developing a comprehensive business plan that you can reference and lean on as you navigate the early stages of your business.
Keeping this in mind, the following is a list of 10 stages that may be followed to establish a staffing agency.
Step 1: Evaluate your own skill sets
If you want to be successful as the creator of a staffing company, there are four essential skill sets that you need to cultivate. You are required to be able to:
- Source employees
- Acquire clients
- Find the perfect talent to suit the demands of the clients.
- Supervise and instruct the workforce or workers
If you are missing even just one of those things, there is a high probability that you will fail. You’ll need an actionable plan for achieving each of these.
Step 2: Determine the most appropriate industry
Your ability to assist and collaborate with the appropriate industry will be one of the decisive elements in your level of success. In a nutshell, you need to be able to locate your specific area of expertise.
You may do this by conducting more research on your market and making certain that you will be able to satisfy the requirements of your target audience. Gain an understanding of the supply and demand cycle of the specialty you have selected. Is demand cyclical? Is it constant? What positions do employers in the industry usually need to have filled? Do they rely on staffing agencies to fill these roles usually? What skill sets will workers need to actually fill these roles? Will you provide solutions to a small business, large enterprise, or healthcare setup?
Also, consider if you actually will be able to fill these roles based on the workers in the surrounding areas. What other kinds of jobs are there to choose from in the area? What kind of prospective demand is there for positions like these?
Step 3: Estimate and budget for your beginning expenditures
There there are two distinct types of expenditures associated with starting a business: establishment and operations.
The expenditures associated with setting up a shop are the fundamental requirements for every company. These are often one-time costs that need to be paid in full or purchased in advance of your official start date, though many of them will be recurring fees as part of your operational expenses. Costs you will have to take into account when starting up the business and beyond may include:
- Legal set-up costs (entity foundation, contracts, etc.)
- Hardware (computers, phones, etc.)
- Software (for HR, accounting, payroll, testing, training, etc.)
- Office space lease
- Insurance (workers’ comp insurance, liability insurance, etc.)
- Recruiting expenses
Step 4: Make a note of the cash flow at the company
One of the most typical errors that new businesses make is that they do not have a solid grasp of cash flow. Otherwise healthy and profitable businesses can go out of business just due to cash flow issues. Just because you have a lot of accounts receivable and are earning a lot does not mean you have a lot of cash flow through the business at any given time. You have to budget accordingly to make sure you always have enough cash on hand to meet your financial obligations, including salaries, rent, insurance payments, interest payments, etc. The last thing you want to let happen is a default on debt simply because you didn’t have enough cash on hand.
When operating a staffing business, workers must be paid on a weekly, bimonthly, or monthly basis. On the other hand, your customers are obligated to make payments to you once every month or once every two months. This can create cash flow shortages and gap periods in which your business does not have a lot of cash as it ways for accounts receivable to be paid.
Any pause in this process has the potential to create major problems for everyone concerned. It is essential that you effectively handle the timing of payments and budgeting in order to prevent cash flow issues, missed payrolls, and tax obligations. A qualified accountant who has experience working with small businesses can often assist in this process.
Step 5: Manage the company’s legal responsibilities
By forming a legal entity for your company, you may shield yourself from any personal responsibility in the event that your company is taken to court. You set should up a separate business bank account for transparency.
There are a number of different legal entity frameworks that your business can choose from. These include sole proprietorships, limited liability companies (LLCs), corporations, and partnerships. You should carefully consider the pros and cons of these different setups before settling on one. Oftentimes, it can help to talk to a legal professional and an accountant to determine the legal liabilities and tax implications associated with the different business frameworks. Once you have decided, you will want to register your business with a state.
Step 6: Obtain the necessary licenses
The next step is to make certain that you have obtained all of the necessary licenses and permissions for operating your firm. The rules and regulations might be somewhat different from one nation to the next.
Step 7: Find clients
Getting customers is typically the most difficult part of running a staffing agency. A lot of this boils down to your personal network and abilities as a salesman, especially early on in your business’s life when you don’t have a long-standing reputation for quality and excellence. This is one of the reasons why it is important to have some prior experience in the industry in which you choose to open a staffing company in. Having prior experience typically means you have pre-existing connections in the industry. It also means you have a background that lends credibility to your company and can give potential clients confidence that your business is right for the job.
In particular, you may want to start with creating a compelling unique selling proposition (USP) that will convince clients to collaborate with you. Think about what you can provide them with something that cannot be obtained from your other rivals.
Step 8: Utilize modern technology
Another error that recruitment agencies are making is the assumption that they can carry out their operations manually. Scheduling, payroll, accounting, and many HR tools can all be automated to improve efficiency and cut costs in the long run. Setting your business up early on so that it can scale is important. The days of working things out on paper, booking appointments in a physical calendar, etc. are gone. Managing the company and its human resources using antiquated practices, such as maintaining spreadsheets and sending out individual emails will become more difficult to keep track of all of them as they accumulate.
Don’t let old-fashioned techniques hold you and your company back. There are so many business tasks that can be automated. Take advantage of all the resources now available to small businesses.
Step 9: Conceive an effective advertising and marketing plan
As part of finding clients, you should begin promoting your staffing agency both online and offline. Develop an effective campaign that will get your name out there and attract the attention of the customers and candidates you need. Odds are your connections alone will not be enough to get your business going – you will need to convince businesses that you may have never even heard of to jump on board and try out your services.
Utilize the power of social media, such as LinkedIn, and Facebook to raise awareness of your business. Consider content marketing as a way to inform customers about what it means to work with your business. And don’t take your foot off the pedal – marketing takes time, effort, and persistence. Success won’t come overnight.
Develop a well-structured marketing strategy, and then make it a point to see to it that it is carried out to the letter.
How Do Staffing Companies Operate and Work?
The following procedure is normally what you can expect as the day-to-day operations of a staffing agency.
Hiring manager makes contact with the employment agency
In the beginning, your business will need to make connections with potential clients. Once they indicate they are interested in your services, you will have to collect information such as the job duties, the number of employees required, the timetable to acquire new workers, and the hourly pay or salary they are looking to pay.
Once you have an idea of what employees the client needs, you will have to develop a job description and market the job to potential candidates. Alternatively, you may already have workers on staff that are capable of filling the needs of the jobs being filled. It is also possible that you may know of prospective applicants that you have worked with in the past, in which case you may begin to contact workers on an individual basis.
Candidates are screened by the agency
After applicants begin sending in their resumes for the vacant job, the agency will evaluate their previous work history and credentials before setting up interviews. They will then choose the applicants who they believe to be the most qualified to present to the client’s hiring manager. This process may differ based on how quickly the positions need to be filled and whether they are looking for temp, temp to hire, or direct hires.
The decision-making authority rests with the employer
Before making a final hiring choice, the hiring manager or the owner of the company might conduct interviews with the top applicants presented by the staffing agency.
All of the necessary documentation will be handled by the agency
The majority of employment agencies are responsible for handling all of the paperwork that is involved with new workers, including contracts, tax filings, and other payroll-related activities. This is because temp and temp to hire employees work for staffing agencies instead of their clients. As a result, they are responsible for handling all the extra tasks that come with having employees. The client, on the other hand, will only be responsible for paying your monthly or bi-monthly invoices for use of the workers.
Financing Options for Your Staffing Agency
When it comes to financing a staffing agency, there are a variety of options available. Depending on the size of your staffing agency and its cash flow, some options may be better suited than others to meet your needs.
Here are some of the most common financing options for your legal business that you should consider:
1. Term Loans
Term loans are loans that last for a set period of time, have fixed repayment dates, and usually fixed interest rates. These loans typically offer the best interest rates of all types of loans and they are a go-to loan type for businesses of all sizes.
Brick-and-mortar banks can be a great option for getting a term loan to fund your staffing agency. They offer competitive interest rates and terms, as well as a long repayment period. The bank will review your business credit rating and financial statements in order to determine the loan amount and terms offered.
If you have good credit and plenty of collateral, you may qualify for attractive interest rates and repayment schedules. However, bank loans are notoriously difficult to get, especially for new businesses.
That’s where alternative lenders (like Biz2Credit) come into play. Alternative lenders are a great resource for small businesses that need financing quickly and/or who do not have a substantial or good credit history. While they typically have higher interest rates, their requirements for funding businesses are much more relaxed and therefore much more accessible for the average small business owner.
2. Merchant Cash Advances
Merchant cash advances are becoming increasingly popular among temporary staffing agency solutions due to their flexibility in repayment terms and relatively quick application process.
The cash advance is typically repaid over a period of several months using automatic payments from your merchant account sales receipts. These advances are ideal for those with bad credit or who need access to quick capital without having to commit to long-term debt with a bank loan or line of credit.
They are also useful for getting out of a cash flow pinch. Merchant cash advances are actually not technically loans. Instead, they give companies access to cash based on their future earnings. However, this also means they cannot be used to get your business up and running. Instead, they are for businesses that are already in operation and have expected future earnings that can be substantiated. That said, we thought we’d mention them here because they are good for small business owners to know about, especially staffing agency owners, once their business is actually in operation.
3. Line of Credit or Credit Card
Lines of credit are offered by banks or other traditional lenders, while credit cards offer revolving lines of credit up to certain limits set by the card issuer.
This type of financing is ideal for short-term cash flow issues or when you need access to extra funds quickly without having to go through an extensive application process or wait weeks for approval from a bank loan officer.
Interest rates vary depending on the lender but tend to be fairly competitive compared to other types of financing options available on the market today. They typically are not ideal for covering long-term debt and other expenses. So, it’s best to avoid these sorts of options – especially credit cards more so than lines of credit – when starting a new business.
4. Business Angel Investors
Angel investors can be great resources if you’re looking for more substantial investments in your staffing agency which can help build infrastructure, hire additional staff, open new offices, etc.
An angel investor is an individual who provides capital investment into businesses at an early stage in exchange for ownership equity in the company – rather than relying solely on debt as traditional bank loans do – and it often comes with valuable business advice as well from experienced entrepreneurs who have been through similar situations before themselves. The best angel investors can help expand your network and provide you with introductions to help you grow your business and find new clients.
5. Equity Crowdfunding & Alternative Financing Platforms
Equity crowdfunding platforms provide individuals, groups, venture capitalists, and accredited investors with access to startup companies seeking funding outside of traditional banks or private investor networks such as angel investors mentioned above.
Through these platforms, anyone can invest smaller amounts in exchange for equity stakes in a company – making them ideal solutions if you’re looking for larger sums of capital than what banks or angel investors typically offer.
6. Other Alternatives
Alternative finance platforms such as those offering invoice factoring, purchase order financing, asset-based lending, etc., provide businesses with even more flexible forms of financing. They do this by leveraging existing assets such as accounts receivables invoices, inventory orders, and equipment leases so that owners can raise additional working capital without taking on additional debt. There are many different ways to get creative about financing. However, remember to always read the terms of any agreement you enter into carefully. You don’t want to be caught off guard and have to fulfill obligations you didn’t realize you were agreeing to in the first place.
Pros of Starting a Staffing Company
Lower Cost per Hire
Staffing companies make their money by charging clients a premium on their workers’ wages. Staffing agencies literally specialize in hiring and maintaining a large workforce. As a result, they benefit from economies of scale and can dramatically lower their cost per hire by having an efficient human resources department.
When you start a staffing company, you also assume less risk than if you were operating a traditional business in terms of the potential for product failure, lack of demand, etc. Staffing companies work for businesses in a specific industry and do not have to worry about generating demand for a particular product, research and development, innovation, or anything like that. If one of their clients goes out of business, then they simply have to look for other businesses in the industry.
However, staffing companies do come with their own unique set of risks, which can sometimes outweigh the reduction in the aforementioned risk depending on the industry you are entering, the economic conditions, and more. We will cover some of these risks later on in the cons section.
Starting a staffing company can also give you more flexibility in terms of the types of positions that you can fill. You may only want to specialize in a specific set of workers in a specific industry so as to develop a niche. Or you may want to offer clients employees with a wide range of skills. You may even want to work in multiple industries or expand to new industries over time. There is a lot of flexibility built into the staffing agency business model inherently. This gives you a lot of different approaches and methods to consider when running your agency.
Staffing companies typically have recruiters who are experts in their field and who know how to find the best candidates for each position. They also usually have access to powerful candidate screening tools that can help to weed out unqualified candidates quickly and efficiently. This helps with a reduction in costs associated with economies of scale, as previously mentioned. It also gives business owners a wide breadth of knowledge, experience, and expertise in their industry and its hiring practices. As a result, even if the business does not work out, you will have valuable skills that will likely allow you to enter into a good job within the industry your agency specialized in, particularly in a quality HR role.
Cons of Starting a Staffing Company
Difficult to Stand Out in a Competitive Market
The core disadvantage of starting your own staffing agency is that it can be difficult to stand out in a competitive market. There are many staffing firms already established, so you will need to find a way to differentiate your company from the rest. Maybe this means offering lower prices, better customer service, or a unique niche market. However, at the end of the day, the success of your staffing company will likely boil down to your skills as a salesman and your ability to bring on clients. There is no replacement for this. Your ability to sell yourself and your business will be key to your success, since, fundamentally, you will be offering a service that many other staffing agencies can provide. Personal relationships and the ability to convince others that your business is the best will be what allow you to separate yourself from the wide array of competition in the marketplace.
Requires a Lot of Time and Hard Work
Starting a staffing company is not a get-rich-quick scheme – it requires a lot of time and hard work. You will need to put in long hours in order to get your business off the ground, and you may not see much profit for several years. This is not the right business venture for someone who is looking for an easy way to make money.
The road to success with a staffing agency is usually slow. It takes time to gain credibility and attention from the industry you are working in. Success won’t come overnight. It will be a slow march forward and there may be setbacks. As such, staffing agencies are not for the novice business owner or someone who doesn’t possess a wide range of skills and industry experience.
Starting your own staffing agency is not easy. As noted, it takes dedication, hard work, and a great deal of skill and knowledge to operate a staffing agency successfully. However, with the right business plan, the proper skills and prior experience, and a solid work ethic, it is certainly achievable. After all, there are thousands of staffing agencies already operating across the United States profitably and successfully.
Biz2Credit is a leading supporter of small businesses across the nation and is dedicated to helping them succeed each day. As part of this, we maintain our Biz2Credit Blog, posting brand-new, exclusive content every day. So, please continue to check back here at our blog for all the latest information, news, and trends impacting America’s small business community.