Is Payroll Financing Worth It?

posted by Chris Valentine

The success of every business depends on its workforce. Employees play a central role in any business, and one way of ensuring that they deliver excellent results is by offering timely payments. Unfortunately, things may not always work as expected for your business. Cash flow fluctuates, forcing you to delay your workers’ payments. However, that can be fixed through payroll financing.

Payroll funding is a strategy to ensure that your workers get timely payments regardless of your business’s financial status. Read on to understand payroll financing and its benefits;

What’s payroll financing?

This is a type of funding meant for business owners to enable them to pay workers on time. Payroll financing is implemented through invoice factoring. Several industries have embraced payroll financing, and it’s working for them. It’s the use of invoice factoring to fund Payroll.

Actually, your workers’ livelihood depends on you, just like your business. So, delaying their payment will cause a lot of inconveniences. However, cash flow problems are inevitable, especially for small businesses and small companies. Let’s look at how payroll financing works;

How exactly does Payroll Financing Operate?

The use of invoice factoring to fund Payroll is quite simple. The payroll finance company will buy your accounts receivable in two installments. The initial installment is referred to as advance. It covers 80-90 percent of your receivables.

Your bank account will be funded within a business day. With the advance, you’ll have instant funds to meet your company’s or business expenses and pay your employees. Immediately your customers entirely pay your invoice, you’ll receive the second installment.

Who is Eligible for Payroll Financing?

It’s easier to qualify for payroll financing than other solutions. That’s because both growing companies and small businesses with financial challenges are open to this option. However, terms and conditions apply, which include;

  •         No liens in contrast to accounts receivable
  •         Excellent invoicing practices
  •         Government clients or creditworthy commercial

Several financing plans are deployed in one week or even less. After deployment, your receivables will be funded as required.

What’s the Cost for Payroll Financing?

A Payroll funding program’s cost mainly depends on your financial needs, the client’s to viable credit quality, and the transaction’s general risk. However, the cost ranges between 1.15%-3.5% per month. More prominent companies attract relatively low prices.

What are the Benefits of Invoice Factoring?

Several benefits come with the use of an invoice factoring strategy to fund Payroll. Below, we’ve highlighted some of them;

Get funds instantly to pay your employees and meet other business/ company expenses.

Offer clients a thirty days term with ease.

  •         Fast deployment
  •         Open for small businesses and companies.
  •         It’s an excellent temporary solution.
  •         It’s easy to access compared to business loans.

As your business grows, the funding line escalates as well.

Considering the above advantages, it’s evident that factoring is a practical solution. However, it has its flaws. For instance, it’s not the cheapest option and only works extensively for clients with over 15% gross margins.

Category of people who can profit from Payroll financing program

Basically, the Payroll financing program aims at helping companies that mainly depend on Payroll. But factoring can help businesses or companies that have to wait for three months for government or commercial customers to pay. Below are some industries that can benefit from this kind of program;

  •         Security
  •         Staffing
  •         Business service providers
  •         Oil and gas
  •         Manufacturing
  •         Healthcare
  •         Consultants
  •         Transportation among others

Factoring is a great payroll financing solution for most companies. Note that it’s specifically meant to solve cash flow challenges that arise due to slow-paying customers.

What are the Qualities of a Payroll Factoring Company?

In factoring, just like any other industry, some individuals or companies are quite unprofessional and do not apply a client-centered approach. Such companies abuse the system and even tarnish the image of reputable lenders. To avoid being prey to such lenders, be sure to look out for the following qualities.

Does the Payroll financing company understand the nature of your business?

Each business has unique needs, whether its construction, transportation, or energy industry. All these niches have varying business processes and require a comprehensive understanding of the working partnership between factoring partners and business to achieve the desired goal.

Closely evaluate the funding company to establish its authenticity

Before trusting a payroll funding company, ensure that they are reliable. Seek to know their source of funds and don’t forget to preview previous client’s reviews. That way, you’ll avoid falling into the wrong hands.

Consider their terms of the transaction

It’s important to review all aspects of the financing agreement carefully. For instance, you can ask which portion/ percentage of the cost is the interest. How much is the service component, and how do those costs compare with your other financing alternatives?

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