Payroll Funding Agreement
Before beginning a financing relationship with a funding partner, understand the steps required to terminate the relationship if needed before the end of the term. Complex structure and lengthy verbiage make contracts difficult to decipher, particularly payroll funding agreements. Transparency and clarity are “must haves” in your payroll funding relationship.
Circumstances may arise whereby you want to switch your payroll funding partner, including:
- Desire to unbundle funding from complete payroll solution
- Lower cost of funds found elsewhere
- Unhappy with level of service of current funding partner
- Desire to switch to a staffing finance expert
Several factors relating to early termination you should be aware of include: length of agreement, auto-renewals, window for notification, early termination fees and other penalties associated with terminating.
Length of Agreement
The term (length) of payroll funding agreements typically lasts one year. However, terms exist lasting as long as two and three years. Since staffing companies experience business swings and rapid growth opportunities more intensely than many other industries, having flexibility and shorter agreement terms are extremely important. For optimal flexibility, don’t agree to terms longer than one year.
Notification and Auto-renewal
The agreement term also comes into play with the auto-renewal clause. Most payroll funding agreements automatically renew for another subsequent term if you don’t provide advance notification of your intent to terminate the relationship. For example, if your two-year contract expires in April of 2017 and you miss the window for notification, you are automatically locked in for another two years or until at least April of 2019.
Remain aware of your auto-renewal date, but more importantly be mindful of the window of notification. The industry standard for the notification window lasts 60-90 days, but longer lead times do exist. Consider marking the notification date on the calendar and giving notice to your payroll funding partner to at least open up the possibility for a better deal. If not, you will automatically be locked in for another term.
Early Termination Fee
The reason for a termination penalty relates to the upfront expense the funding partner incurs. Setting up the facility requires time and resources at the onset, so it typically takes the contract term to recover those costs.
A standard early termination fee is calculated as (monthly minimum fee X the number of months remaining in the term). The inputs for that calculation should be easily found in your payroll funding agreement. Another calculation could be (monthly minimum volume X a pre-determined percentage). Make sure you complete these calculations before signing your agreement to understand what it would cost you for early termination. Even with an early termination fee, there may be situations where it’s advantageous or imperative to terminate.
To recap the most important points of your payroll funding exit strategy:
1. Don’t sign multi-year agreements
2. Identify your notification date for early termination and set up a calendar reminder to revisit the agreement each year
3. Know exactly what it costs to exit your agreement early should you want to go with another partner
At The Southern Bank Company, our successful 80-year banking history exemplifies our commitment to treating customers fairly and with the utmost transparency. Through our altLINE program, we provide competitive and straight forward payroll funding for growth-oriented staffing companies.