Cash flow can make or break small businesses and owner-operators. When your payroll is due, cash flow issues can make it difficult to pay everyone on time. In this case, payroll factoring offers a practical solution for temporary payroll funding.
What is payroll funding? As with other types of invoice factoring, with payroll funding, the invoices are factored by a factoring company. You can receive up to 90% of the invoice value to cover payroll and other expenses. Want to prevent cash flow issues? Keep reading to learn how.
And when you’re finished, check out the other content in our ‘Finances of factoring’ article series:
- What is a factoring company in trucking and how does it help?
- How freight invoice factoring impacts trucking business finances
- Accounts receivable financing vs factoring
- Can factoring be used for temporary payroll funding?
- Best factoring company for trucking
How does payroll funding work?
Payroll funding takes two forms: payroll factoring and payroll funding. Both factoring and funding work similarly to other forms of invoice factoring. You’ll sell invoices and turn them over to a factoring company for a fee. In turn, you’ll receive up to 95% of the invoice value within days to cover payroll expenses.
The primary advantage is immediate cash to cover payroll. The disadvantage is the cost and that the factoring company will collect directly from clients. This can lead to issues with clients.
The key difference between payroll funding and payroll factoring is that with payroll funding, the loan amount is decided by your company’s credit score, and the payroll amount is covered. With payroll factoring, you’ll receive a set percentage of the invoices. Learn more about invoice factoring and how it can help your company with all types of cash flow.
How do you get funding for payroll?
You can fund your payroll in different ways, some riskier and more expensive than others. Factoring with a reputable company improves the ease and reliability of funding.
When you factor invoices with a reputable company, you’ll sell those invoices to the company and collect most of the value of the invoice. For most small businesses, this is easier and more cost-effective than spending additional time on collections. With highly-rated, reputable invoice factoring companies, businesses secure funding and reduce cash flow issues.
How fast will I get the money for payroll funding with factoring?
Sometimes you can receive money for funding through factoring within just a day of approval from a factoring company. How soon you get the money will depend on the company and its approval process.
Should your payments go to a factoring company?
Yes, if you factor invoices, your clients will pay the factoring company directly. That means clients will transfer funds directly to the factoring company when the invoices are due instead of paying you. This saves time in collections but also means the factoring company will collect from your clients directly.
How do startups get payroll funding?
One way for startups to make payroll, if they are already offering invoiced goods or services, is with invoice factoring and payroll funding. In this case, the payroll financing is an early payment of outstanding invoices with a net-30 or longer payment period.
Other ways startups can get funding include crowdfunding, venture capital, venture debt funds, angel investors and government loans.
Common requirements
For payroll funding from a factoring company, factors will look at customers’ credit scores and overall business performance. Generally, it is easier to qualify for payroll funding than a small business loan, making it a better solution
Advantages
Payroll funding makes sense in a variety of situations. It can be a cost-effective way to outsource invoice collections, and a quick solution to improve cash flow. Here are the key advantages:
Offer longer payment terms
For many potential clients, the option for longer payment terms like net-30 or net-60 can be a deciding factor in working with your company. When you use payroll funding, you don’t have to worry about fund availability when clients have longer payment terms. That’s a win for your company and your clients.
Improved cash flow
Cash flow issues can trip up many well-run businesses. Whether a client pays late or the bills are due too soon, payroll funding can help mitigate cash crunches. With funding based on invoice factoring, you can access earned income faster, improve your cash flow and open up team expansion opportunities.
Employee retention
Of course, delayed payroll can make employee retention difficult. In some cases, even rumors of cash flow issues can send top hires looking for a more stable company. Payroll funding ensures you can attract and retain top talent with stable offerings.
Ease of approval
Payroll funding is easier to qualify for than business loans or private funding, and puts cash in your account within days. The application process is usually simpler than conventional loans because the funding is based on existing invoices and customers.
Disadvantages
While payroll funding offers many benefits, there are some disadvantages to consider during the evaluation process.
Factoring depends on invoices
With payroll funding through factoring, the factoring company must approve invoices and determine payment amounts based on client credit scores and payment histories. This can delay funding or reduce the amount in some cases.
Costs
If the funding comes from a loan, you could pay high interest for a short time period. You’ll lose 1% to 10% of the invoice value even with factored invoices. While that may not be much for a $1,000 invoice, if you regularly factor in $10,000 invoices, you could be paying too high to fix a cash flow problem.
Doesn’t address long-term business problems
Weigh costs against growth goals to decide whether payroll funding makes sense for your company over the long term. Sometimes, short-term cash flow issues hide other business problems that need to be addressed. How to do payroll should be a temporary question, not a constant problem.
Likewise, payroll funding is limited to payroll payments. You’ll need to consider freight factoring or other funding sources if you need funding for other equipment or business expenses.
Who can benefit from payroll funding?
Any company can benefit from funding from time to time, but it is especially helpful for companies such as:
- Owner-operators with unpaid invoices
- Small companies with limited employees
- Startups and other companies in growth phases
- Trucking companies with long payment terms
- Any company under a cash-flow crunch to cover payroll
Getting funding when you need it
As a business owner, access to cash flow at critical moments can be the key to success, growth and expansion. Payroll funding through invoice factoring is one more tool to ensure there’s never a delay in employee payments. Factoring companies for trucking or using top invoice factoring companies, along with strategies for business growth, can position your company to attract and retain reliable talent and focus on exceptional service.
FAQ
Yes, you can get a loan specifically designed to cover payroll expenses. These are often called payroll loans or payroll funding.
Payroll funding means securing financing to meet your company’s needs. It ensures that you can pay your employees on time.
The cost of payroll financing varies widely. Factors include interest rates, loan amount, and the lender’s terms.
Sign up for a FreightWaves e-newsletter to stay informed of all news and trends impacting supply chain careers and operations.
