Payroll Funding for Small Businesses

To a small business, few things are as important as making payroll. Your company depends on the performance of your employees for its success. And your employees depend on getting their paychecks from you on time.

One of the worst things that can happen to a business owner is missing payroll. Missing your first payroll cycle often starts a chain of events that only gets worse. In many cases, the company ends up going out of business.

The challenge of making payroll

Making payroll is challenging for small businesses and startups. There are a lot of things you have to do – and you have to do them right.

You have to track time sheets and handle payments. Actually, just handling taxes alone can be complicated, especially when you factor in state taxes. Although there are programs that can help you with this task, it’s still a lot of work.

On top of this, you need to make sure that your payroll bank account has enough money on the right date to cover all these expenses. And this is where things can get difficult.

How is your cash flow?

In an ideal world, your clients would pay their invoices shortly after you submit them. The reality is different. Corporate clients often pay their invoices in 30 to 60 days. Some companies even take 90 days. Few small business owners take this delay into account when they start hiring employees. However, this oversight can create a problem.

Clients are paying in 30 to 60 days, but employees must be paid monthly (or bi-weekly). Unless you have a cash reserve to make payroll, you will encounter problems. If you have not been watching your cash flow or bank accounts carefully, you may not find out until it is too late. Now you are in real trouble.

What is payroll funding?

One way to solve this problem is to use payroll funding. For most people, payroll funding usually refers to using invoice factoring to cover payroll. However, other financing products may be used as well.

Invoice factoring is a type of financing that enables you to fund slow-paying invoices due from creditworthy commercial clients. Instead of waiting up to 60 days for payment, you get the funds directly from the factoring company. These funds provide your small business with the working capital to cover payroll and other expenses.

How does invoice factoring work?

Setting up an account with a factoring company takes a week or two. Once the account is set up, your company is ready to finance invoices.

To get funding, submit approved invoices to the factoring company. Depending on your industry, the factor provides an initial advance of 80% to 90% of the invoice. You get these funds within a business day. The remaining 10% to 20% is retained to cover any invoice underpayments.

Once your client pays the invoice in full, the factor rebates the remaining 10% to 15%, less a small fee for the service. If you want to learn more, here is a good explanation of factoring.

Improve cash flow

Most companies that use factoring finance their invoices regularly. Most choose to factor at least enough to ensure that payroll and other important expenses are paid for.

Consider taking this opportunity to also start building a cash reserve for your business. A cash reserve helps you handle cash flow issues and reduces your reliance on financing.

Advantages for small businesses

Factoring plans have a number of advantages over other solutions. The most important advantage is that factoring can be used to solve payroll problems caused by slow-paying clients.

Also, factoring is available to most small business. The most important requirement to qualify is to have good, creditworthy commercial clients and unencumbered invoices.

One advantage that is helpful later is that factoring lines can be used to grow your business – often substantially. The line automatically increases as your sales to approved customers grow. This flexibility ensures that your cash flow is covered and makes payroll funding a great option for small and growing companies.

Which industries can use a payroll funding solution?

Payroll funding is very common in payroll-heavy industries such as staffing and security agencies. However, this solution can be used by any company that has employees and qualifies for the service.

Get payroll funding!

We are a leading payroll funding company and can provide you with a competitive quote. Fill out this form for an instant quote or call us toll-free at (877) 300 3258.

Are there other options?

If you do not work with commercial clients or don’t qualify for factoring, refer to this list for a number of other options.