What is Payroll Funding?
Last Updated on September 8, 2021
Payroll funding is a type of invoice factoring specific to the staffing industry. Just like invoice factoring, payroll funding turns a business’s outstanding invoices into cash by selling them to a third party.
Staffing companies often fall victim to long invoice terms and slow-paying customers. At the same time, they’re forced to make payroll and other routine expenses, leaving them in the predicament of consistently not having enough cash on hand. Payroll funding allows these staffing companies to access fast cash by paying a small fee in order to liquidate their invoices immediately.
How does payroll funding work?
Once you’ve applied for payroll funding, and are approved, you will submit invoices to your customer as usual. The payroll funding company will purchase those outstanding invoices from your business and give you 80-90% of the cash value that day. The provider then collects the invoice directly from your customer. Once collected, the provider returns the remaining 10-20% to your business, minus a small payroll funding fee of 1-5%.
Here are the five simple steps to payroll funding:
- Your staffing company provides a service to your customer, then sends an invoice.
- You submit that invoice to the payroll funding provider for funding.
- The payroll funding provider advances between 80-90% of the invoice value to your business.
- Your customer makes the payment directly to the payroll funding provider, which goes into a lockbox in your name.
- The remaining 10-20% of the invoice value is released to you, minus a small payroll funding fee.
For more complete information about payroll funding and available providers, visit payrollfunding.com.
Advantages and Disadvantages of Payroll Funding
The main benefit of payroll funding is a boost in cash flow which allows staffing company owners to meet payroll and invest in growth sustainably. Other benefits include:
- Accounts receivable collection/management
- Customer credit checks, performed by the payroll funding provider
- The ability to scale your financing needs
- Reduced profit margins for your business
- Hidden costs and fees from bad/irreputable payroll funding providers
Is payroll funding easy?
Yes, payroll funding is very easy, 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 providers better than others?
Yes, there are certainly better payroll funding companies than others. Some specialize in the staffing industry, while others serve a broader range of invoice factoring customers. Not all companies will be transparent about their fees and terms. 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 is specific to the staffing industry. 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.
If your business falls in any other B2B industry, but you similarly struggle with cash flow issues, you should consider invoice factoring – a more broad solution that will likely fit your needs. Read our guide on how to factor invoices for more details.
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 for your business, your customers and your invoices. They’ll likely request a financing application, proof of identification, invoice aging and customer list. Be prepared to provide information quickly to take full advantage of the fast turnaround time that payroll funding can offer.
To get started with your application, request a free quote today.
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.