Keeping cash flow steady is a headache for businesses of all types and sizes. In many industries, the time between when a business needs to pay its bills and when the associated revenues come in is unpredictable. To keep the lights on, businesses need to constantly chase down clients for payment. Very few industries, however, suffer the kind of unpredictability faced by labour hire firms.
Labour hire firms prominently operate in a wide range of industries, from mining, to manufacturing, to construction. They function by providing the temporary or medium term labour their clients need, and fulfil an important role by acting as a middle man that connects businesses with large numbers of appropriately skilled workers on relatively short notice. Unfortunately, the niche they occupy in the supply chain also inherently places them in a difficult financial position.
Labour hire firms face unique payment challenges
A company that uses labour hire faces all the same financial challenges as any other business. That means keeping their own working capital stable, and managing their own cash flow issues. When their customers pay late, equipment breaks down, or funds are stressed in some other way, outgoing payments might be delayed. The crucial point is that, when a business’ labour is supplied via a third party instead of through direct employment, that supplier payment can be delayed as well.
Labour hire makes it possible to delay payroll
While significant legal protections ensure that employees need to be paid on time, businesses are expected to spend vast amounts of time and resources chasing down late payments. This means that businesses who use labour hire have more flexibility when it comes to paying their workers—at least those they don’t employ directly. Even if they go on to pay the labour hire firm as quickly as they can using whatever means they can organise, supplier payments might still be slowed by several days. Like most Australian businesses, they would manage this through a combination of financing, and by delaying payments until sufficient capital is available. The labour hire firm, in the meantime, can’t afford to wait even that long.
Acting as a de facto financier
Unlike most businesses, labour hire firms can’t simply turn around and delay outgoing payments to their own suppliers. Since the product they sell is labour, and workers typically need to be paid weekly, there simply aren’t any business suppliers to whom payment could be delayed. Instead, they’re forced to simply absorb the cost and wait it out until payments come in. That leaves labour hire firms often acting as a free de facto short term lender to their customers, which is an unsustainable position for any business.
Supply chain finance takes the pressure off
Even if labour hire firms could force their clients to always pay on time, contributing to a client’s financial uncertainty is not in the firm’s best interest. Supply chain finance is a tool that ensures financial security for both parties, so firms can be paid on time in the short term, while also keeping their customers’ working capital stable in the longer term.
Getting paid on time, every time
By having clients finance payments through supply chain finance, labour hire firms can ensure that they’re always paid on time. Instead of paying out of their own working capital, the customer can make payments from a third party fund that’s furnished by investors. The payments on the balance of that fund can then be deferred, and dealt with on the customer’s own time.
This allows labour hire firms to budget reliably, and to pay their employees and other expenses in a timely manner. More importantly, it gives them the freedom to confidently invest in their own growth and development without the constant fear of financial instability as a result of late payment issues.
Getting paid early
Getting all of a business’ clients to pay using supply chain finance isn’t always an option. In most cases, the labour hire firm will be able to secure steady financed payment from some clients, and not from others. While that makes the firm’s finances more stable overall, customers who refuse to use supply chain finance might still cause some cash flow interruptions. To manage this, businesses can turn to their more cooperative customers for some mutually beneficial support.
Instead of applying for a loan, businesses can negotiate to receive early payments from their financed customers in exchange for a predetermined discount. If both parties agree, the financial institution simply releases the funds. In this arrangement, the firm gets the cash it needs, while the customer saves a significant amount of money. Most importantly, the paying business still doesn’t pay out of their working capital. Instead, the payment is again made from their credit fund, and only comes due when the original invoice would have. This creates a mutually beneficial relationship that allows businesses to support each other, while ensuring that both have the funds they need to operate effectively.