What Is Payroll Funding and How Does It Work?

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 is a financing solution for staffing companies that allows them to access fast cash by paying a small fee in order to liquidate their invoices immediately. Read on to better understand what payroll funding is, how the process works, the pros and cons of using payroll funding, and how to find a quality payroll funding provider.

What Is Payroll Funding?

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 at a discounted rate. The staffing company can then use the cash advance to pay operating expenses, including making payroll on time.

How Does Payroll Funding Work?

Once you’ve applied for payroll funding, and are approved, you will send invoices to your customer(s) 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. 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% invoice value 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 that customer an invoice.
You submit that invoice to the payroll funding provider.
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.

See How We Helped Preferred Staffing Triple in Size

Preferred Staffing wanted to expand into new industries, but long customer payment cycles made this a risky move. The Preferred Staffing team decided to work with altLINE to boost working capital, make payroll easier to meet, and grow their client list.

Read the story

How Much Does Payroll Funding Cost?

Payroll funding rates, also called factoring rates or discount fees, can vary depending on your company; however, they are typically 1 – 5% of the invoice value. Factors that influence the rate you receive can include:

The creditworthiness of your customers
The amount you plan to factor
The amount of time your invoices tend to remain outstanding

Advantages and Disadvantages of Payroll Funding

Any form of business financing comes with its respective pros and cons, and payroll funding is no different. Below is a summary of the biggest advantages and disadvantages there are to using payroll funding.

Pros of Payroll Funding	Cons of Payroll Funding
Quick and reliable access to cash	Reduced profit margins given the cost of funding
Free customer credit checks on new and existing customers	Potential hidden costs from irreputable payroll funding providers
A scalable financing solution	–
Accounts receivable collection and management	–

Payroll Funding Advantages

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. 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, by working with a payroll funding provider, you get access 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 less accounts receivable collection and 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 altLINE, you can rest assured that all of our fees are transparent, so you won’t be surprised by hidden fees after the onboarding process.

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 Payroll Funding 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.

Partner 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, our team 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 Pendergast

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.

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What Is Payroll Funding and How Does It Work?