Imagine a business where you’re the bridge between opportunity and talent, where every day presents a new challenge and the chance to help others achieve their professional goals. This is the world of a temp agency – a thriving industry that not only offers flexibility to workers but also provides essential staffing solutions to businesses.
With the right skills and preparation, starting a profitable temp agency may be easier than you think, and our guide is here to illuminate the path from ideation to successful startup.
A temporary staffing agency assists businesses in filling open positions, such as full-time, short-term, project-based, or contract-to-hire employment. As the agency owner, you recruit, screen, hire, and manage a pool of temporary employees. When a client business contracts with your agency to fill an employment need, you match an appropriate temp from your pool to the client. If no current candidates meet the job description, the agency will create a job posting and vet candidates.
Before the agency sends over candidates to their clients, they spend considerable time reviewing resumes and qualifications and performing interviews to ensure a good match. Often, the client conducts their own interviews before making a final decision. If the client hires a candidate sent from the agency, the agency earns income from that successful hire.
The pay varies depending on the contract; however, most employment agencies charge a percentage markup of the worker’s wages to keep as their earnings. Therefore, the agency is motivated to send quality candidates to increase the chances of getting hired.
During the hiring process, the agency negotiates the worker’s compensation plus the agency’s markup. First, the client pays the wage directly to the agency, then the agency keeps its markup and pays the worker their wage.
Additionally, if a client wants to hire a worker for a full-time position, the client pays the agency a buyout fee. However, a buyout only occurs if the hire happens before the agreed minimum hours are met and is usually a percentage of the worker’s salary.
The temp agency industry in the United States is a significant component of the labor market. The U.S. temporary staffing segment generated $263 billion in annual sales in 2022, and is expected to continue expanding.1
Two key drivers of growth are increased business focus on maintaining variable labor costs and temporary employees’ preference for flexible work over traditional employment. As the economy grows, more businesses turn to temporary staffing firms to find qualified candidates without high fixed labor costs. At the same time, trends like the gig economy mean more job seekers are actively choosing temporary assignments aligned with their skills and interests. With increasing demand from clients and a growing labor pool, new temp agency startups have a great opportunity.
Steps To Start A Temp Agency
Step 1: Write a Business Plan
The first step in starting a temp staffing agency is the business plan. Many entrepreneurs skip this step unless the lender requires them to write one for funding. Not only does a business plan help with the funding, but it also has you prioritize the goals and objectives you need to turn your idea into a reality.
Related: How to write a business plan
Step 2: Secure Funding
Finding the money to start a temp agency is the next step in the process. Here, we’ll explore the sources of funding that can be utilized to start a temp agency.
Personal investment: Your first source of funding is your personal savings. Assess how much money you can contribute to finance the business. If your savings aren’t sufficient to cover startup costs, consider alternative funding sources.
Traditional lenders: When outside funding is needed, banks and financial institutions are common sources. They generally require you to contribute at least 15% of your personal funds to the project cost, have a good credit score, and provide collateral. In case the bank seeks additional security for the loan, a Small Business Administration (SBA) loan guarantee can be pursued.
Friends and family: Borrowing money from friends and family is another way of securing funds. It is important to put any agreements in writing to maintain healthy personal and business relationships.
Microloans: If you need a smaller amount or face obstacles with traditional lending options, consider microloans. Local economic development organizations often offer these loans and may also provide business training to help ensure your success.
Step 3: Register the Business
Choosing a Business Structure: First, decide on the structure of your business. Each type has its advantages and implications for liability, taxes, and operations. Here are the four main types of business structures:
- Sole proprietorship: This is the simplest form of business structure and has the lowest cost. The downside is that the owner is personally liable for the business.
- General partnership: If your temp agency will be owned by two or more individuals, you can form a general partnership. Similar to a sole proprietorship, all partners share the profits, losses, and legal liabilities.
- Corporation: A corporation is a legal entity separate from its owners (shareholders), providing them with personal liability protection. The downside is that it is more expensive and complex to start and operate.
- Limited Liability Company (LLC): An LLC combines features of both corporations and sole proprietorships/partnerships. Owners (members) of an LLC enjoy limited personal liability and have fewer formalities.
Related: Comparison of business structures
Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
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Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.
During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.
Obtain business licenses and permits: While licensing requirements vary from state to state for temporary staffing agencies, here is a breakdown of some of the more common registrations.
- State licensing: Most states require a state employment agency license before beginning operations.
- Business licenses: Some states and many cities require businesses to be licensed to legally operate, in addition to obtaining a seller’s permit.
- Federal Employer Identification Number (FEIN): Assigned by the IRS, the FEIN is a unique number that identifies your business for tax purposes.
Step 4: Set Up Operations
As you transition from the planning to the operational phase of starting your temp agency, the focus shifts to establishing operations.
Your first task is to decide where your agency will call home, and this decision hinges on whether to lease a physical office or operate from home. If leasing, consider locating your office near businesses that frequently require temporary staff, such as restaurants, hotels, and catering companies. This proximity not only increases visibility but also fosters stronger business relationships. Equally important is accessibility for your staff. Consider areas that are easy to get to and close to public transportation, making it easier for your employees to reach the office for testing and assignments.
Once you’ve secured a location, the next task is creating a professional and functional office environment by investing in the necessary technology and furnishings, such as an area for private interviews, a comfortable waiting room, and a productive workspace for your team.
Last, set up a system for managing administrative processes, such as establishing systems for payroll, invoicing, and tracking employee assignments.
Step 5: Obtain Insurance
As a staffing agency, you’ll be required to have insurance not only for your internal staff but also for the people you hire out. The specific insurance requirements for obtaining a temporary staffing agency license vary by state, but here are a few common ones to look for:
- Workers’ compensation insurance: Nearly all states require staffing agencies to carry workers’ compensation insurance for all W-2 employees. This covers any work-related injuries or illnesses suffered by employees of the agency itself.
- Employment Practices Liability Insurance (EPLI): Some states mandate that staffing firms hold EPLI policies to guard against claims of discrimination, wrongful termination, or harassment brought by internal employees or placed temporary workers.
- Professional liability insurance: A few states require that staffing agencies hold errors and omissions or professional liability insurance, which protects against negligence claims from client businesses related to the temporary workers screened, supplied, and managed by the agency.
- Surety Bonds: A small number of states require staffing agencies to post surety bonds with state regulators to maintain their license. This guarantees the agency’s financial responsibility and fulfillment of legal obligations. Typical amounts range from $25,000 to $100,000.
In addition to meeting any mandatory statewide insurance requirements, staffing agencies should also carry general business liability coverage at a minimum.
Step 6: Create a Marketing Strategy
Before starting a new temp agency, it’s important to have a solid marketing plan in place, and the best way to go about it is to start by prioritizing your target customer.
Start by answering who your ideal customer is and why they would use your staffing company. By starting with the target market in mind, a promotional strategy will start to fall in place.
Some popular online marketing ideas for temp agencies include having an attractive website and taking advantage of digital marketing platforms such as LinkedIn, Facebook, Twitter, and Instagram. Offline methods are also important not to overlook, including reaching out to nearby businesses and organizations to hand out business cards and let them know about your services, joining local Chambers of Commerce, and traditional advertising in the newspaper, television, and radio.
Step 7: Recruit Staff
After setting up your office space and handling all the administrative details, the next step towards getting your temp staffing agency up and running is hiring a team and building a talent pool of potential candidates for employers to hire from.
Step 8: Prepare to Launch!
After addressing the primary steps of starting a temp agency, there are additional aspects that will need attention. These tasks will vary by individual but may include:
Setting up bookkeeping: Arrange an accounting system to manage daily financial transactions, tax obligations, and the creation of financial statements. This might involve either hiring a bookkeeper or utilizing specialized accounting software.
Opening a business bank account: A separate bank account for your temp agency will help keep personal and business finances clear and easy to manage.
Joining industry associations: Consider becoming a member of industry associations such as the American Staffing Association (ASA) and the National Association of Personnel Services (NAPS). These organizations offer networking opportunities, professional development resources, and industry-specific insights and updates, which can be invaluable for your business growth and knowledge.
Preparing for the grand opening: Plan a grand opening event to mark the launch of your agency. This can be an excellent opportunity for local marketing, building client relationships, and establishing your presence in the community. Consider promotions or special offers to attract initial clients and temp workers.
Common Questions When Starting A Temp Agency
How much does it cost to start a temp agency?
Startup costs for temp agencies can be a minimal investment, especially if your business starts small. However, the costs increase when you add commercial space and employees. The total initial investment for a temp agency can range from $4,000 to $30,000 or more, depending on various factors such as location, size, and market niche. Here’s a breakdown of the main expenses:
Office space: The cost of leasing office space and minor renovations could range from $2,000 to $10,000 or more.
Furniture and equipment: You’ll need to furnish your office and purchase equipment like computers, printers, and phones. This could cost between $1,000 and $10,000.
Insurance: The initial cost of insurance can range from $1,000 to $3,000.
Marketing and advertising: Initial marketing and advertising expenses, such as website development, business cards, and promotional materials, could range from $1,500 to $5,000.
Business registration: Registering your business involves fees that can range from $50 to $500, depending on the state and the type of business entity you choose
Technology and software: Investing in staffing software to manage your workforce and client relationships is crucial. Initial setup costs can range from $500 to $2,000.
Office supplies and materials: Initial inventory of office supplies and materials could cost between $500 and $1,000
How profitable is a temp agency?
When evaluating the potential profitability of a temp agency, several factors come into play, including the market demand, the billing rate for temporary staff, and operational costs. To illustrate this, let’s consider a hypothetical scenario.
Revenue projections: Suppose a temp agency manages to place 50 temporary employees per month. If the average billing rate per hour is $25, and each employee works an average of 30 hours a week, the weekly revenue from one employee would be $750 (30 hours x $25). For 50 employees, this equates to $37,500 per week or approximately $150,000 per month.
Expense projections: The major expenses for a temp agency include employee wages, operational costs, and overhead expenses like rent, utilities, and insurance. If the agency pays the temporary employees an average of $15 per hour, the weekly cost per employee would be $450 (30 hours x $15). For 50 employees, this amounts to $22,500 per week or about $90,000 per month. Adding operational costs (including rent, utilities, marketing, insurance, salaries for internal staff, etc.), let’s assume these amount to $30,000 per month.
Profit calculation: With the estimated monthly revenue of $150,000 and total expenses (wages plus operational costs) of $120,000 ($90,000 + $30,000), the monthly profit before taxes would be $30,000. Annually, this translates to a profit of $360,000 before taxes.
This example is a simplified illustration, and actual profits can vary.
What skills are needed to run a temp agency?
Because temp agencies operate as facilitators between businesses and workers, communication skills are necessary. But what else makes you successful? Here are a few essential skills:
Negotiation: Negotiation is a skill that allows you to strategically line up contracts with businesses and gain agreement on your worker’s wages and markup. Negotiation is essential because it directly affects how much money you make. So, you need to be able to advocate for wages and markup income at a level that benefits your business. Fortunately, negotiation is a skill that can be learned.
Sales: Sales, like negotiation, require strategy. But the difference is that sales skills help convince or encourage clients to use your service, whereas negotiation is more about advocating the finer details. In addition, sales skills help you gain contracts and add workers to your talent pool.
Schedule management: A large part of the business involves screening applicants and sending them to open positions. So, managing your schedule and your applicants’ schedules is essential. A disorganized schedule can make your business appear unprofessional, cause missed appointments, and result in losing clients and talent.
Understanding of role responsibilities and qualifications: Companies using your services trust your abilities to find quality candidates. Therefore, you need to understand the role or the essential skills necessary to fill the position to meet your client’s needs. You don’t need to be an expert in every field, but you do need to be able to explain the role to candidates and establish if they are a good fit.
What is the NAICS code for a temp agency?
The NAICS code for a temp agency is 561311.
The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.
Related: What is a NAICS code?