Opinions about the future of the United States economy are everywhere. Who’s right? Who’s just an alarmist? Who knows? But there is one thing you can count on in 2023: banks will tighten up on lending after years of overflowing liquidity.
For staffing agencies with existing lines of credit and those hoping to get them, that means getting ready for difficult conversations with your bank and possibly seeking out different financial approaches to keep your cash flowing and taking on new clients. What can you expect?
The Federal Reserve has a legal mandate to achieve two goals: keep prices stable and maximize employment. Unemployment remains at record lows, so there’s no mystery behind the current strategy of the Federal Reserve—it is trying to pour cold water on an economy to slow demand while supply catches up from its pandemic-induced slumber, leading to inflation. While the Fed doubtlessly hopes for a “soft” landing (i.e., a recession that isn’t too deep or too long), it has a single, blunt tool against the enemy of inflation. The Fed will not stop acting until inflation drops to the target of 2.0%, regardless of how hard the landing is.
After dropping rates to 0% during the 2020 height of the pandemic, the Fed raised the target federal funds rate seven consecutive times in 2022, pushing it to its highest mark since December 2007, 4.25% to 4.50%. Despite these aggressive actions, there have been only marginal changes in unemployment and inflation. Most experts expect that the Fed will raise rates again, and few expect rates to fall anytime soon.
While this may seem like a headache-inducing academic exercise, it has real effects on both your staffing company and the financial institution that seemed happy to loan you money over the last several years. Higher interest rates mean higher costs to banks. As they see their margins squeezed, banks will tighten up their lending profiles and charge higher rates on the loans and lines of credit they are willing to extend.
At the same time, staffing agencies are facing their own challenges with an uncertain economy. Companies are putting off hiring, including temporary staff, as they delay growth projects. According to the American Staffing Association, temporary staffing jobs overall as of February 19th, 2023, are 4.5% below same week last year. As the economy inevitably slows due to the Fed’s rate adjustments, all staffing demand segments will likely suffer to some extent. So, while your bank is feeling the pressure, your company probably will be, too.
With their costs rising, banks will be even more leery of losses. They will closely watch specific market segments to identify underperforming loans. Whether banks will ride out the stresses on the staffing industry without making major changes is unknown, but they will certainly be watching your financial disclosures closely. If your financials do not meet the covenants imposed by your loan documents, you will be hearing from your lender. Banks will behave differently to protect their own financial stability, but the strength of your relationship with your lender may help, so be prepared for more questions and more conversations about how your business is doing more frequently. Somewhere at your bank, a Credit Committee will be closely examining your business.
If your bank deems your loan a “special asset,” they may want to close out that loan or line of credit. Your bank doesn’t want your business to fail—they just don’t want to risk losses. So instead, they’ll encourage you to seek alternative sources of funding. Your banker may even refer you to a company that provides non-traditional forms of finance, hoping that you’ll return to the bank when the waters are less troubled. Whether or not that alternative lender is the right fit for your company is up to you to figure out.
Payroll funding, also called AR financing or factoring, is a form of business funding that allows a staffing agency to sell its receivables to a third-party funding source to increase cash flow. The advantage is the cash advances; by selling your invoices, you generate cash immediately instead of waiting for your customers to pay you. Payroll funding is a creative solution to manage your cash flow and cover payroll without adding debt, selling off equity or drawing on expensive lines of credit.
Traditional factoring arrangements may not fit your situation. Long-term factoring contracts don’t offer much flexibility in funding or terminating the facility when you’re ready to go back to bank financing. That’s why TCI Business Capital offers a “hybrid” solution: it allows a staffing agency to choose when and how much to fund and imposes no termination fee whenever you move back to a bank line. The hybrid facility is there whenever you need it, growing as you grow without charging you for money you don’t need, and it leaves you free to go to traditional bank lending when your business rebounds with the economy.
With the certainty of economic volatility ahead, it’s essential to know what your options are to keep your business running. Be prepared for tougher conversations with your banker about business performance. And, if your current bank says no to a loan or to increasing your company’s line of credit, know that high-interest private loans and costly alternative financing are not the only options. Payroll funding is affordable and allows you to leverage the value of your accounts receivable to access cash. The result is a more predictable cash flow and more working capital to protect your company’s financial health, provide you with confidence that payroll and critical bills can get paid, and seize business opportunities whenever and wherever they arise. And a good facility doesn’t trap you into a long-term arrangement that doesn’t fit as your circumstances change, but instead gives you the freedom to access cash when you need it and move on when you don’t.