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What is Payroll Funding? How Does It Work?
Payroll financing is a tool allows your company to finance invoices and assets so that it can make payroll. It usually refers to a common use of invoice factoring, though it can also refer to other solutions.
Let’s look at the problem
Making payroll is one of the biggest responsibilities for a business owner. As a matter of fact, the success of your business depends on your ability to pay employees regularly and on time.
But making payroll can be difficult, especially for small and growing companies. There are a number of cash flow situations that can affect your ability to make payroll. Some businesses have seasonal sales and don’t have reserves to cover payroll during the slow season. Others are growing very quickly, and their growth gets ahead of their cash reserves.
However, the most common problem is that most commercial sales are done on net-30 to net-60 terms. This ties your funds to slow-paying receivables. This drains your cash reserves. And if your cash reserves are not sufficient, you run into problems.
This is where invoice factoring can help you.
How does payroll funding work?
Using invoice factoring to finance payroll is relatively simple. You agree to sell your accounts receivable to the payroll funding company, who buys them in two installment payments.
The first installment is called the advance and covers between 80% – 95% (varies by industry) of the value of your invoice. The funds are usually deposited to your bank account within a business day. The second installment is rebated as soon as your customer pays the invoice in full. At that time, the payroll finance company rebates the remaining funds, less a financing fee.
If you need more details, learn more by reading “What is factoring?”
How much does it cost?
The cost of using a payroll financing program is based on the amount of funds that you need and the commercial credit quality of your clients. In general, costs can rage from 1.15% to 3.5% per 30 days. Very large companies can get even lower costs. Learn more about typical factoring rates.
Using an invoice factoring plan to finance payroll has a number of advantages. Here are some of the most important ones:
Provides funds to meet payroll
It improves your cash flow, often quickly
Allows you to offer net-30 terms to clients
Easier to get than a business loan
Faster to get than conventional financing
The financing line increases as your business grows
Does not incur in debt (useful for larger companies)
However, factoring is not a perfect solution and has some disadvantages.
The two most important disadvantages are:
It’s not the cheapest option
It’s is not completely transparent to your customers
There two issues should not be a problem for most though, especially if your gross margins are above 15%.
Who can benefit from this solution?
Companies that invoice commercial clients and have to wait 15 – 90 days to get paid use payroll financing.
Obviously, companies that depend heavily on payroll use this solution as well. Common industries include:
Business service providers
Oil and gas
For most of these companies, factoring is the right solution because it is designed to solve this specific problem very well.
Do you need payroll funding?
We are a leading payroll financing company and can provide you with a competitive proposal. For a quote, call Millennium Millionaire Mindset Company at (678) 718-5646 , firstname.lastname@example.org
Looking for more options?
If your business does not qualify for factoring, there are other alternatives that can be used to finance payroll. Here is a list of other Commercial Business Loan financing options for your consideration:
Asset Based Lending
Business Cash Advance
Distributors and Resellers
Oil & Gas
Supply Chain Finance
Vendor Financing Programs
Download the PDF Below for more information about our Commercial Payroll Funding Program
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