How to Start a Temp Agency
Temp agencies began in the U.S. at the turn of the 20th century in response to helping workers find jobs. At first, temp agencies helped those out of work. But, in the 1960s, temporary roles became more popular, and businesses started using agencies to fill short-term positions—such as filling in for an employee on leave. In today’s era, you can start a temp agency for minimal cost and with few hurdles, making it an excellent business opportunity for driven entrepreneurs.
Business Description
A temp agency assists businesses in filling open positions, such as full-time, short-term, project-based, or contract-to-hire employment. The business, or client, alerts the agency of a role they’re looking to fill, and the agency sends over candidates from their existing group of workers. If no current candidates meet the job description, the agency will create a job posting and vet candidates for the role.
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 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.
Industry Summary
Office staffing and temp agencies earned $235 billion in revenue in 2022. This figure represents industry growth—an industry that consistently improved over the previous five years by an average of 2.8% each year. In addition to revenue growth, the number of temp agency businesses has also grown.
Between 2017 and 2022, the number of temp agencies grew by an average of 2.1%. As a result, there were nearly 16,000 temp and office staffing agencies in 2022. Although staffing agencies exist all over the U.S., California, and Texas had the highest number of businesses offering office staffing and temp agency services.
Related Industries
Industry Trends
Temp agencies do well in many economic environments. The agency can find workers for long-term positions when companies have full-time openings, or the agency can provide contract work for more minor, short-term assignments. The economy plays a major role in the types of positions companies want to fill. Long-term positions tend to be more scarce during tough economic times and cutbacks.
Recession. In times of recession, long-term roles tend to decrease, and short-term positions increase. Although temp agencies still have work filling short-term roles, the more lucrative contracts (i.e., long-term jobs) are less available.
However, cutbacks can also affect all temp positions. For example, some areas that may be cut first are temporary positions and contractor roles. So, when the economy suffers, temp agencies have fewer positions to fill (which drives up competition), and existing contracts may dissolve as companies strive to save money.
Competition. Competition is common for temp agencies, mainly due to the low barrier to entry. A low entry barrier means starting a temp agency business has fewer hurdles. As the number of businesses offering temp agency services increases, the level of competition increases.
Hiring flexibility. Hiring flexibility means that businesses employ a variety of workers and not only full-time employees. This growing trend puts temp agencies in a good spot because agencies can quickly fill short-term or long-term temporary positions, allowing businesses to try out an employee before hiring full-time.
Likewise, employees can try out a company before committing to a full-time role. Hiring flexibility results in more work for temp agencies and increases overall profits.
Target Market
The target market for a temp agency is two-fold. On the one hand, the agency needs to gain contracts from businesses to have positions to fill. Secondly, the agency needs workers to fill the positions. So, the agency needs to appeal to the workers too. Let’s take a deeper look at these two markets.
Businesses. The types of employers that utilize temp agencies vary considerably. However, some of the more common types of businesses using agencies include medical offices, law offices, tech, HR, and accounting. For businesses, you will want to get in contact with their HR department or the directors in charge of hiring.
Workers. Some examples of workers that may use agencies include college students, young adults, individuals going through career transitions, freelancers, contractors, and individuals looking for flexible jobs. For instance, workers starting in a new industry may partner with an agency to find short-term work to help get their foot in the door at a company or in a role they admire.
Checklist for Starting a Temp Agency
There are several important steps and considerations you should take into account when starting a temp agency. Starting out can be intimidating, and tasks such as making sure to properly form the business, ensuring necessary regulatory requirements are met, and having a solid marketing plan in place are critical.
Using our checklist should help make it easier to get started so you can feel confident launching your temp agency.
Step 1: Write a Business Plan
When starting a temp agency, having a comprehensive business plan is essential for the long-term success of your business.
Not only does a business plan help to prioritize the goals and objectives you need to turn your idea into a reality, but it also helps serves as your roadmap to better understand what resources are required, how much capital is needed, and most importantly, how much profit can be expected.
Related: How to write a business plan
Step 2: Decide on a Business Name
Naming a temp agency isn’t easy.
On one hand, you want it to be memorable and creative, while on the other hand, you want it to accurately reflect the services offered – oh and be available to use as well.
To get started, brainstorm some ideas by focusing on the industry or the values you want to promote, such as loyalty and integrity. Thinking of words that are related to core concepts will help narrow down your list. With this shortlist, you can test out different combinations of words until you find something that resonates with you.
Finally, make sure the name is available to register (especially important when forming a corporation or Limited Liability Company) and that the domain name is available before committing to a name for your agency.
Related: Tips on naming a business
Step 3: Form a Legal Business Entity
A business entity (also referred to as a business structure) refers to how a business is legally organized to operate. There are four primary business structures to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.
When deciding on which business entity is best for a temp agency, it normally comes down to the corporation and Limited Liability Company.
A sole proprietorship and partnership are not often the right entity as the owner’s personal assets are at risk if the business is sued. There is a lot of risk for staffing agencies because if a leased employee does something that causes harm to one of your customers, the business may be held liable, and the owners are personally on the hook.
The corporation and Limited Liability Company are good choices to minimize liability risk because it separates the business assets from the owner’s assets. If the corporation or LLC is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them.
The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.
Related: Guide to forming your LLC
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.
Some popular LLC formation services include:
IncFile - $0 plus state fees & free registered agent for 1 year!
ZenBusiness - Best for beginners. $0 plus state fees & free registered agent for 1 year!
Northwest - Best privacy protection. $39 plus state fees & free registered agent for 1 year!
Step 4: Select Your Location
Picking a location for a new temp agency is an important process as you have two customers.
The most important thing to consider when choosing the ideal location is access to nearby businesses that may need the services of a staffing agency. Look for areas with high concentrations of restaurants, hotels, catering companies, and factories that are likely to use the services of a temp office.
You’ll also want to make sure potential clients can easily get to your office for testing and to send in the field. Be sure to look for an area that has plenty of transportation routes, not only roads but also train and bus stations.
On top of this, you also need to consider where your competition is located. If other staffing firms are in close proximity, scout out how they’re running their business, what locations they’re based at, and whether it makes sense for you to move into the same vicinity or seek out another locale.
Related: Choosing a business location
Step 5: Apply for 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 license before beginning operations.
Business license. Some states and many cities require every business to be licensed in order to legally operate.
Federal Employer Identification Number (FEIN). The FEIN is a unique number assigned by the IRS to identify a business.
Step 6: Find Financing
Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a temp agency is another. Fortunately, the cost to start a new temp agency is relatively low; however, funding to start a business can be difficult. Banks are typically going to want the borrower to have good credit and be able to invest 15-25% of their money towards the total start-up costs.
Step 7: Open a Business Bank Account
Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.
Step 8: Establish Pricing
Setting the correct pricing is essential when establishing a temp agency.
Begin by researching your competitors to get a sense of what is being charged in your area. From there, calculate your overhead costs, such as administrative staff, marketing, and any overhead expenses, along with the profits you need to make this business worth the investment.
Step 9: Create Contracts
Several contracts are going to be needed as a temp agency, and hiring an employment attorney from the beginning is going to be well worth the expense. While there are DIY contracts on the internet, these contracts will help limit the liability of your business.
Step 10: Get your Marketing Plan in Place
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 is your ideal customer, and why would they use your services? By starting with the target market in mind, then 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 to not overlook, and some of these include 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.
Related: Low-cost ideas to market a new business
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Step 11: Get Business Insurance
A temp agency needs to be prepared for anything, which is why finding the right kind of insurance important.
Depending on the type of work being offered and potential liability, there are certain types of insurance for a temp agency to consider. A few of these include:
– Worker’s compensation insurance
– General liability insurance
– Professional liability insurance
– Property insurance
– Employment practices liability insurance
When shopping around for insurance, understanding what your needs are and exploring different coverage options can help make sure you get the most suitable policy for your business.
Step 12: Find Staff
Now that the business is set up and ready to go, it’s time to find staff to hire out.
Options will vary depending on the type of staff needed, but some cost-effective solutions include:
– Posting jobs to your website
– Working with job placement organizations
– Using job boards like Indeed or Craigslist
– Reaching out to local community colleges or universities that offer career services programs
– Hosting job fairs
Step 13: Set up Software
A good temp agency is should be up-to-date with technology and use software that helps them support their candidates and their clients.
There are several software solutions specifically designed to handle candidate onboarding, job postings/listings management, screening processes, placement tracking, payroll processing, reporting, customer billing, and more.
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. Generally, you can start a temp agency for as low as $1,500 and climb to prices over $20,000.
Business formation. Business formation costs include licenses, permits, and insurance. The state regulates business licenses and permits. So, check your state’s website for small businesses to determine the cost. In most scenarios, the price for licenses and permits remains below $1,000.
Likewise, insurance costs are variable. The best way to get an insurance price is to contact an insurance company or an insurance agent for a quote.
Location costs. Location costs may be irrelevant if you operate remotely or out of your home. However, with a brick-and-mortar location, you will need to allocate funds for rent and utilities. Most commercial locations rent space priced per square foot per year.
A common range for commercial space is between $15 – $50 per square foot per year. For instance, less-populated areas tend to have lower rent prices. So, for example, a 1,000-square-foot commercial space leased at $15 per square foot costs $15,000 annually.
Employee wages. As your business grows, you may employ assistants, recruitment managers, accountants, or sales staff to help complete tasks. Wages vary depending on the role, but for example, the average administrative assistant earns about $18 per hour in the U.S., whereas a recruitment manager may earn $31 per hour.
Management software. Software systems can help streamline processes. For instance, a hiring management software helps track a position from the original job post to the final hire. Many management software systems charge a monthly fee, with a typical base fee of around $100 per month.
Equipment. Your essential equipment will be a phone and a computer—an average, mid-range laptop and phone cost between $500 – $1,000 each.
How profitable is a temp agency?
A temp agency has the potential to earn $26,000 annually per employee that makes $50 an hour. Let’s break down this estimate. A staffing company earn money from a successful placement of a temporary worker. The income comes from a percentage markup of the employee’s wages.
So, in this example, the contract with the hiring business includes a 25% markup on the worker’s wages. The worker is paid an hourly rate of $50 per hour, but your business earns $12.50 for every hour worked. So, with the worker’s wage plus the markup, your client pays $62.50 per hour for the worker. From the $12.50 earned per hour, your business makes $26,000 annually for an employee who clocks 40 hours per week.
Are there grants to start a temp agency?
It’s extremely rare to find a grant to start a temp agency. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.
Legitimate federal grants can be found at Grants.gov, and you can check on your state’s economic development office to see if they have any grants available.
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?
Final Thoughts
A temp agency is a great way to make semi-passive income through successful placements. However, the work to achieve these placements can be tedious. Nevertheless, the work is worthwhile because your income will multiply once the connections begin to stick and you get better at selecting quality candidates for quality positions.
