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What does a recruiting business do?
According to a recent post by Zippia.com, 72% of employers reported that they struggled to find qualified candidates for job openings. The same study reported that a vacant job position costs a company an average of $98 per day. Those statistics show that there is a great demand for effective recruitment processes and that the industry is alive and well. If you’re still not sure if this is the right industry for your new business venture, continue reading to learn more about what recruiters do, the costs of starting your own agency, and some great tips on how to get started.
Recruiting businesses work with two types of clients: job seekers and employers. For job seekers, recruiters work to find job openings that meet their desired criteria in terms of location, industry, salary, and company culture. They also work with qualified job candidates to help them identify their professional strengths, write a proper resume, prepare for interviews, and negotiate the terms of a job offer. For employers, recruiters narrow down job applicants and provide the company with a few qualified candidates to move to the interview process. Recruiters save the employer a great deal of time by speaking with the candidates prior to introducing them to the hiring manager to make sure that both parties are a good fit for each other. Some recruiters work within a niche, like human resources or accounting and finance, but some work with a diverse group of potential candidates and employers.
How much does it cost to start a recruiting business?
Recruiting companies are among some of the least expensive types of small businesses to open with the average startup costs being $19,267. Just like with any other industry the exact amount of money an entrepreneur will need to open the doors of their recruiting agency depends on several factors, including the organizational structure (sole proprietorship, limited liability company (LLC), etc…) of the business, number of employees, business model, and location. Some of the expenses to plan for when creating a recruiting business include:
- Legal fees to register the business name and form the company
- Computer hardware, industry software, including CRM and Squarespace, and licensing
- Templates for employer and job seeker contracts
- Business Licenses and permits, pricing will vary depending on the requirements and geographical location
- Website and domain name
- Marketing materials and business cards
- Commercial Real Estate (CRE) costs if you plan to purchase or lease office space
- Business insurance policy, like general liability coverage
- Internet and cell phone services
- Office supplies
- Accounting software, like QuickBooks or Sage Intacct
- Fees associated with a business bank account
- Salary and wage expenses for yourself and any administrative or professional staff members
How to start a recruiting business
Opening a recruiting firm can be a very rewarding experience, but it requires planning. Professionals in the recruiting industry have several options when it comes to starting their own business. They can choose to start small on a part-time basis as a way to supplement a full-time income, or they can dive in and open a fully functioning recruitment office with multiple employees.
Once the initial business idea is in place, the first step in starting a recruitment agency is to write a proper business plan that provides a documented outline of how to start and run the business. The business plan gives a detailed account of the business including the services offered and the target market. It provides information about building and growing the business, advertising, financial plans, and the current competition in the industry.
Many entrepreneurs write their own business plans using references like those provided by the Small Business Administration (SBA) or other experts. Once a good business plan is created it is reviewed and revised on a regular basis, often annually. These plans can be used as a reference and to guide decision-making for many years to come. Business plans may also be required by investors, lenders, and banks when discussing investment opportunities and financing options.
After creating a business plan, the company can be legally formed by taking the following steps:
- Create a legal entity – Recruitment start-up businesses can be set up as sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. There are advantages to each of the business structures. Most startup recruiting firms begin as an LLC because it limits the business owner’s personal and financial liability.
- Register with tax authorities – New companies will need to register with both state and federal tax authorities. After inquiring with local and state authorities about necessary tax obligations, young recruiting businesses must register for an Employer Identification Number (EIN) with the Internal Revenue Service (IRS).
- Apply for permits and licenses – Most types of small businesses require some permits and licenses to operate. To determine which types of licenses are required, check with the town, city, or county clerk’s office. The SBA also offers references to help small businesses get licensed.
- Set up bank accounts and credit cards – Before working with clients or securing financing, open a bank account and get a business credit card. Entrepreneurs often begin business banking relationships at the same banks they use for personal finances.
Marketing describes the activity of promoting and selling products and services. Market research and exploring the target customer of an entity are also considered part of marketing. Once established, recruiting businesses attract clients through word of mouth, social media presences, and continued marketing efforts. Entrepreneurs new to the recruiting industry can try the following methods to market their business:
- Build relationships with local talent through social media platforms, like LinkedIn, Facebook, and Instagram
- Reach out to local nonprofit organizations that help job seekers find placement
- Distribute contact information physically and through email to local businesses that may be searching for candidates
- Ask current candidates, friends, and professional contacts for new client referrals
- Place general employment ads on job boards and interact with applicants
- Connect with others through job fairs, trade shows, and open houses
- Offer discounted retainer fees to new companies
- Ask to be featured by local media outlets, like radio and television
- Start a website that features an informative blog for candidates. Use SEO friendly content to increase web traffic and build a following
- Offer free online or in-person courses in resume writing and interview preparation techniques
How to finance a recruiting business
Not all entrepreneurs have access to the capital required to get their recruiting agency up and running, which is where small business financing options come in. There are several ways to finance the purchase of a recruiting business including peer-to-peer (P2P) loans, crowdfunding, and using personal savings or taking out personal loans. However, the risks associated with borrowing money from friends and family or draining their personal savings or retirement funds are too significant for some. Many small business owners prefer to fund their new ventures using a loan or line of credit because the transactions have less risk to their personal well-being. Since there are so many different types of financing available, entrepreneurs can choose the type of funding and repayment terms that will best meet their new business needs.
Borrowers that choose to explore funding options typically work with one of two types of lenders: traditional lenders or alternative lenders. Like every other part of the business planning process, there are advantages and disadvantages to both options.
- Traditional lenders – Loans from traditional lenders come from banks, credit unions, and other brick-and-mortar financial institutions, like Bank of America, Wells Fargo, and U.S. Bank. These types of loans are attractive options to established business owners that prefer working with a name they recognize. Traditional bank loans offer lower interest rates than loans from alternative lenders but can come with very strict eligibility requirements and a long approval process.
- Alternative lenders – Alternative lenders include online lending marketplaces, like Biz2Credit. Online lenders approve loans much faster than traditional banks, allowing borrowers to access their funds in as fast as 1-3 business days. Online lenders offer an easy online application process, so there are no appointments or long waits necessary. Small business loans from alternative lenders work well for startup businesses and borrowers with a less-than-perfect credit score or bad credit history because of their flexible eligibility requirements.
Types of loans
There are many different types of loans for entrepreneurs in professional services, like recruiting. When considering which loan will best suit your business plan, consider funding times, approval requirements, repayment terms, and lender preference.
SBA loans are a great option for many small business owners because of their low down payment requirements and fair repayment schedules. The programs are backed by the Small Business Association but financed by a traditional or alternative lender. The SBA will guarantee up to 85% of loans through one of their approved lenders. This makes the loans low risk, so lenders can offer more attractive repayment terms and better interest rates. With an SBA loan, payments are made to the lender each month and rarely have prepayment penalties.
While many business owners consider SBA loans to be the best financing option for ventures like a recruiting business, they can be very difficult to be approved for. The SBA application process is a long financing process with some of the strictest approval requirements. SBA loans typically require that applicants have a proven credit history, a detailed business plan, and several years in the industry. Some of the loan programs through the SBA require that the cash flow of the business is at least 125% of the owner’s salary and debt service payments, which can be tough for new business owners.
Term loans are among the most common type of small business financing used to start a new business or refinance a current loan. With a term loan, the borrower receives a lump sum of money upfront that is repaid over time according to a predetermined repayment schedule. Approved borrowers agree to either a fixed or variable interest rate. With a variable interest rate, the interest portion of the monthly payment will fluctuate and is determined by the market rate and the term of the loan, but fixed rates remain the same throughout the life of the loan.
The approval requirements vary for term loans depending on the type of term loan and the lender issuing the funds. Creditworthiness, which includes the owner’s personal credit score, is used to determine what amount of loan the borrower can be approved for and if a down payment is required. Borrowers with bad credit scores may also consider a secured term loan, that uses a personal guarantee in addition to requiring collateral.
Revolving credit lines
A business line of credit and business credit cards are often considered short-term loan options for new entrepreneurs in the recruitment industry. These types of revolving credit extensions offer borrowers the capital they need when starting a business with a great deal of flexibility. While the interest rates and minimum credit scores required for credit cards can be discouraging to new businesses, business lines of credit offer better terms and fast funding, so they are a great option for purchasers that want to avoid unexpected financing costs.
The interest rates for a line of credit are typically higher than those of traditional term loans, but interest is only paid on the amount of credit the borrower has withdrawn. Once the balance is paid off, the credit becomes available again, just like with credit cards. This type of financing is common for cash flow fluctuations, and large purchases, like the start-up costs for a recruiting business or staffing agency.
Starting your own recruitment business can be very rewarding. Since vacant positions cost employers a lot of time and money (and since recruiters work on commission), there’s high demand for competent recruiting agencies in many industries. If capital is needed to start your company, consider reaching out to Biz2Credit to learn about the financing options available to you. The financing experts there can share the story of how they arranged funding for The Party Staff, Inc, as well as provide you with several funding options for your new business.