Funding key to establishing a lucrative temp business
From Short List.
Getting the funding right for a temp recruitment company can make the difference between losing personal assets when a business fails, and getting a larger slice of the $19 billion the local industry is worth annually, while a particular model for calculating charge rates will make rates discussions with clients far easier to manage, experts say.
One of financing specialist David Payne's clients sold a temp business with annual turnover of more than $13 million within five years of starting up with capital of just $15,000 – and there's no reason other recruiters can't achieve the same feat with the right funding and business discipline, he says in industry trainer Sophie Robertson's new book Secrets to Running a Lucrative Temp Desk.
Before approaching a lender, however, recruiters should determine how much funding they need by looking at factors such as how many temps or contractors they'll employ, which will determine the facility limit and whether they use a bank or an alternative lender, says Payne, who is the owner of outsourced financial solutions company, and BRW Fast Starter, Book Builders.
Establishing margins is also important in calculating funding requirements. This can be tricky as competitors are unlikely to share their rates, but recruiters can usually gauge what is appropriate through their own industry experience or by finding a mentor, he says.
"Take into account that as funders generally only fund up to 80% of the invoice value, any difference must be covered by the business owners, so a higher margin will mean finding less funding from personal sources."
Once they have calculated how much funding is required, recruiters should construct a funding requirement proposal to present to potential lenders, says Payne, adding that the facility limit will determine how much work is required on this proposal.
"If the required debt facility is less than $1.5 million you may be able to avoid having to provide detailed forecasts by working with a good account manager who can help you through the process," he says.
"If the facility is more than $1.5 million be prepared to pay an accountant to prepare a 'three-way forecast' (profit and loss, balance sheet and cash flows)."
Identifying funding requirements can be expensive – "expect to pay $20,000 to $30,000 for an expert to help you through the process" – and recruiters should ensure they're working with an accountant who is skilled in this specialist area, he adds.
How to ask a lender for funding
When drafting a funding request, consider what a lender needs to know in order to approve the funding, advises Payne.
"Prepare for any of the lenders' concerns, anticipate their questions and formulate contingency answers before the preliminary meeting. Your accountant can help with this," he says.
"Remember that the bigger the risk you are asking them to take, the more they are exposing themselves to potential fraud or business failure. The higher the risk, the higher the interest."
Recruiters should also speak with their peers and seek connections with sympathetic lenders, says Payne.
"If you are approaching a major bank don't just go to your local branch – they may be hamstrung by restrictive lending criteria. If possible go as high up in the bank as you can, for example to the state lending manager, as he or she may be able to negotiate better terms and rates," he says.
"Compare the offers of various lenders. Never just take the first offer you receive and remember that 'everything is negotiable', no matter what they tell you about bank policy."
In order to set a business up to succeed, recruiters should ideally get a loan that's structured in a "flexible way", says Payne.
"That's why debtor finance (factoring) may be more advantageous than equity finance (where investors contribute finance in return for a share in the business). Equity is limited to the amount of capital that you or other shareholders have available – plus with debtor finance the bank is not going to ask for half your profit when you eventually sell the business."
What to charge for your temps
Once a business is up and running, recruiters can calculate an appropriate temp charge rate by adding on-costs and a markup to the temp's hourly pay rate, says author Sophie Robertson in her book, which will launch this week in Perth.
On-costs vary from state to state, but in NSW, for example, they can include 9.25% superannuation, 5.45% payroll tax, 2% workers compensation, and 1% professional indemnity and public insurances.
"You can round this up to 18% on-costs. If you choose to use a 30% markup, then your charge rate [on an hourly pay rate of $21.76]... would be $33.38 per hour," she says.
"It costs you $21.76 + 18% = $25.68 to have this person out working per hour, as this includes the rate paid to the temp plus all relevant on-costs. Your gross margin per hour would be $33.38 - $25.68 = $7.70."
Robertson says it's better to use a formula like this to develop a charge rate, rather than working to a fixed dollar margin regardless of what type of temp is being supplied.
"The higher-skilled temps are scarcer and therefore harder to find, which means the margin the client pays you for sourcing, attracting, and managing those higher-skilled temps isn't aligned with the amount of work you're investing in filling their assignment," she says.
"If you use the formula with a markup as a percentage component then your dollar margin will be proportional to the level of temp skill required."
Recruiters should always be comfortable discussing rates with clients, and the more specific they are in setting expectations, the fewer problems will appear later on, says Robertson.
"I suspect some clients use requesting a discount as a 'test' to see how willing you are to defend your expertise. Sadly I know that many recruiters automatically say 'yes' when asked to drop their rates, which in turn causes them to feel resentment towards the client. In my view this situation is completely of your own choosing and making," she says.
"If your client insists on having a say in the rate charged then let her decide which temp she wants. Most clients will actually choose the more expensive person when they understand the difference in skill set... The conversation always needs to be about value, and not dollars and cents."
Sophie will share her tips for avoiding seven common temp business mistakes in an upcoming webinar that is free for Shortlist subscribers – click here to find out more or register. The 75-minute session will include roughly 20 minutes of Q&A, so don't miss your chance to get expert advice for free.