Staffing companies routinely deal with long invoice payment terms and slow-paying customers. This puts many staffing agencies in the precarious situation of potentially not having enough cash on hand to pay employees on time.
Fortunately, there’s a type of financing tailored for staffing agencies that struggle to make payroll on time: payroll funding.
Payroll funding for staffing companies allows agency owners to access cash more quickly and immediately improve cash flow. But if you’re new to the staffing financing realm, you may be unfamiliar with how payroll funding works.
Read on to better understand what payroll funding for staffing companies is, how the process works, the pros and cons of payroll funding for small businesses, and how to find a quality payroll funding provider.
What Is Payroll Funding?
Payroll funding is a type of invoice factoring specific to staffing companies. We’ll overview in more detail how payroll funding for staffing firms works in a bit, but to summarize: payroll funding involves selling outstanding invoices to a third-party payroll funding company, in exchange for an immediate advance against the majority of each invoice value. The staffing company can then use the cash advance to pay operating expenses. Particularly, making payroll on time.
Payroll funding is available for all types of staffing companies, from temp staffing agencies to contract staffing agencies. Even more niche employment firms, such as per diem nursing agencies and locum tenens companies, can benefit from payroll funding.
How Does Payroll Funding Work?
The first real step of payroll funding is to apply to work with a payroll funding company, such as altLINE.
If you’re approved, the payroll funding company will purchase your outstanding invoices and give you 80-90% of the cash value within 24 to 36 hours. From there, the payroll funding provider will collect the outstanding invoice payments directly from your customer(s). Once collected, the provider releases the remaining 10-20% of the invoice value to your business, minus a small payroll funding fee (typically 1-5%).
To recap, here are the five steps of the payroll funding process:
- Invoice your customer.
- You submit the outstanding invoice to your payroll funding provider.
- The payroll funding provider advances between 80-90% of the invoice value to your business within 24 to 36 hours.
- Your customer makes the payment directly to the payroll funding provider, which goes into a secure lockbox in your name.
- The remaining 10-20% of the invoice value is released to your business, minus a small payroll funding fee.
How Much Does Payroll Funding Cost?
Payroll funding rates and fees can vary depending on your company; however, they are typically 1-5% of the invoice value. The three main factors that influence the rate you receive can include:
- The creditworthiness of your customers
- The dollar amount (volume) of invoices you plan to submit for funding
- The amount of time your invoices tend to remain outstanding
You can see how the total cost of payroll funding varies. If your customers are reliable to pay on time and you’re submitting a high volume of invoices for funding, payroll funding will be cheaper, and you’re going to get lower rates than if your customers are notorious for paying after the due date and your monthly funding volume is low.
Payroll Funding Rates and Fees
Typical payroll funding rates and fees will include the following:
- ACH Fee: This is a transaction fee that payroll funding companies may choose to assess anytime funds are transferred via ACH. It typically ranges between $5 and $30 (though altLINE does not charge for ACH transfers). ACH fees should be negotiated out of payroll funding contracts.
- Wire Fee: If you need to access funds immediately, most factoring companies can issue a wire as opposed to an ACH. A bank-backed payroll funding company is charged a wire fee by the Federal Reserve, and those fees are often passed through to your business.
- Initial Filing Fee / Origination Fee: An initial filing fee (or origination fee) is charged to process your payroll funding application. These fees can range from 0% to 3% of the credit line amount. However, we will not charge the fee until after you have been funded, so you do not need to worry about paying an application fee with the risk of not being approved.
- Float Days: While not technically fees, float days are a time allowance for check clearance that most payroll funding companies work into their contracts. This time allowance can bump you into the next tier of fees in an incremental rate structure, which can result in you being charged more. altLINE does not include float days in our contracts.
- Lockbox Fee: Sometimes referred to as a monitoring fee, the lockbox fee is a monthly fee ranging from $50 to $1,000 per month. For most payroll funding partnerships, a lockbox fee should not be necessary unless it comes with significantly reduced factor fees.
- Monthly Minimum Volume Fee: This fee is only applied should the company not factor a predetermined volume of invoices (measured in dollars) in a given month. High monthly minimum fees can increase overall invoice factoring costs and limit the financing flexibility of the borrower.
- Unused Line Fee: This fee is typically reserved for larger transactions and is not as common as other fees listed. It is a percentage fee applied to the average unused portion of the overall credit line for a given month.
- Credit Approvals: Credit approvals are common to see in payroll funding contracts and can cost anywhere between $35 and $100 per credit check on your debtors, though altLINE does not charge for credit approvals.
- Renewal Fee: Many factoring companies charge an annual renewal fee that is equal to a percentage of the overall line size. Don’t get caught off guard at renewal time and be sure to negotiate this fee out when possible.
Two Types of Payroll Funding Companies
Before beginning your research into payroll funding providers, it’s imperative that you understand that there are two types of companies you can work with: bank-backed payroll funding companies and independent companies.
A payroll funding provider with a bank affiliation (a “bank factoring company”) is going to be much more regulated than an independent provider. A bank factoring company like altLINE is FDIC-insured, state and federally regulated, and draws funds from the bank itself rather than an unknown source.
Meanwhile, independent payroll funding companies can get away with being predatory with their borrowers. They might implement hidden fees in their contracts, not abide by requirements set for federal institutions, and draw funds from a third party.
As a rule of thumb, you should begin your search with strictly payroll funding companies with a bank affiliation.
Pros and Cons of Payroll Funding
Below are some of the most common benefits of payroll funding for small businesses, along with a few potential pitfalls:
| Pros of Payroll Funding | Cons of Payroll Funding |
| Quick and reliable access to cash | Slightly reduced profit margins given the fees associated |
| Free customer credit checks on new and existing customers | Potential hidden costs from independent payroll funding providers |
| Scalable financing (volume of funds can grow with your business) | Debtors may initially be wary of a third party’s involvement with the invoicing process. |
| The payroll funding company assumes accounts receivable collection and management responsibilities | x |
| Payroll funding is not a loan, meaning no debt is incurred for the borrower. Instead, it’s a sale of outstanding receivables | x |
Payroll Funding Advantages
The main benefit of payroll funding is a cash flow boost, which allows staffing company owners to meet payroll and invest in growth sustainably. Additionally, payroll funding is easily scaled, meaning this financing solution can grow with your company.
However, there are some additional benefits that come from using payroll funding to finance your staffing company that are not quite as obvious as the above.
For example, payroll funding for staffing agency owners leads to free customer credit checks. This is because a payroll funding company wants to make sure any invoices they factor are for creditworthy debtors that will make reliable and on-time payments. This means that each time you bring on a new customer and want to factor their invoices with your payroll funding company, you will receive a complimentary customer credit check as well.
Additionally, payroll funding companies provide back-office benefits, specifically by supporting your AR processes. Your customers will remit payment to your payroll funding provider, meaning you have fewer accounts receivable management responsibilities on your plate.
Payroll Funding Disadvantages
As with any type of business financing, there are some reasons why payroll funding may not be the right fit for your company. The biggest downside tends to be the cost. Payroll funding rates are typically 1-5% of the invoice value. Additionally, depending on the provider you choose to factor with, you may be faced with additional hidden fees, such as lockbox fees or monthly access fees.
However, if you choose to get payroll funding with a transparent bank-backed lender, you won’t be surprised by hidden fees after the onboarding process.
Overall, the payroll funding process is a more straightforward form of financing, particularly when compared to other types of traditional financing or bank lending. Because the provider is counting on your customers to ultimately pay your invoices, they care more about the creditworthiness of your customers than your business. That allows business owners with poor credit or limited operating history to still acquire payroll funding.
Payroll funding is not a loan—it’s a sale of your assets (invoices) in exchange for cash. That means that the financing does not count as debt on your balance sheet and only minimally impacts your credit (simply from the initial credit checks). This is another reason staffing companies find payroll funding to be a preferable option for immediate working capital needs.
Are Some Payroll Funding Providers Better Than Others?
Yes, there are certainly better payroll funding companies than others. As mentioned, it’s best to prioritize providers like altLINE who are affiliated with a bank to add some protection.
Additionally, some specialize in the staffing industry, while others serve a broader range of invoice factoring customers. As a responsible business owner, you need to protect your staffing company by thoroughly vetting your payroll funding provider, ensuring that you read the fine print of your agreement. Trust is critical with any financing, and it’s no different for payroll funding. Do your research and select a company you can trust, and make sure you have an exit strategy.
Is Payroll Funding Right for My Business?
Payroll funding services are tailored for staffing firms, but some businesses are a better fit than others. If you own a staffing company and struggle with slow-paying customers, long invoice terms, and other cash flow issues, payroll funding may be the perfect solution.
Here are some common reasons many choose to use payroll funding for startup staffing companies and growing staffing agencies alike:
- A shortage of working capital makes it difficult to make payroll on time.
- Cash flow problems are preventing potential business growth opportunities.
- Long payment terms are making it tough to take on new business.
- Slow-paying debtors are dictating cash flow.
- Accounting responsibilities, specifically collections, are tedious and time-consuming, thus cutting into time that could otherwise be spent driving sales and winning new clients.
If one or more of these scenarios sound familiar, payroll funding could be the perfect fit.
What Will I Need to Get Started?
Every payroll funding company has its own unique process for approval, but to get started, most simply want to get a better understanding of your business, your customers, and your invoices. They’ll likely request the following for your payroll funding application:
- Proof of personal identification
- A business bank account
- A tax ID number
- Accounts receivable aging report
- List of customers
Be prepared to provide information quickly to take full advantage of the fast turnaround time that payroll funding can offer.
Payroll Funding with altLINE
Here at altLINE, we offer top rated payroll funding and invoice factoring services. Not only do we have an A+ rating from the BBB and are highly recommended on Trustpilot, but our team also offers best-in-class customer service to make the payroll funding process as easy as possible for you and your company.
Additionally, altLINE is an extension of the Southern Bank Company, meaning we have direct access to funds and are federally regulated, letting you rest assured that your financing partner is transparent and trustworthy.
To get started with your application, request a free quote today, or give us a call at +1 (205) 607-0811.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.
