Not being able to make payroll isn't a good feeling for any business owner. It can become a scramble to find the money needed to pay employees. Finally, the time to decide arrives - should you delay payroll? No employee will be happy about getting paid late and some may even leave the company. While the situation can seem bleak, business owners do have a way out.
It's called payroll funding. In this article, you'll learn what it is and how it can help your business fund payroll.
For startups, funding payroll can be problematic. After supplying services to customers and invoices them, the wait is on for payment. This can take 60 to 90 days, depending on the net terms agreed to with customers. However, employees aren't going to wait two or three months to get paid.
The problem can be worse for temporary staffing agencies. Staffing agencies may have a rotation of temporary workers, depending on skillset needed and services required by customers. These temporary workers may be paid every week or two weeks putting excessive demand on payroll. Like most businesses, temporary staffing agencies bill on credit. Unless the company is well-managed, it will have a difficult time meeting weekly payroll.
Both scenarios are where payroll funding comes to the rescue.
What Is Payroll Funding?
Payroll funding lets a company receive an advanced on its invoices. The Payroll funding company (also called a payroll factoring company) will look at the creditworthiness of each customer. It will then qualify a percentage of invoices for funding. A percentage of the value of those invoices, generally around 90 percent, is then advanced to the company. Once customers pay their invoices, the remaining percentage (i.e., 10 percent), minus a fee, is advanced to the company.
The advance removes any delay in getting paid and allows the company to meet its payroll. As long as the company is billing creditworthy customers, it can take an advance on outstanding invoices and pay its employees.
Besides the creditworthiness of customers, the business owner must send timesheets to the payroll funding company. This is often done online. Along with the creditworthiness of customers, it's part of the payroll funding company's qualification criteria.
With most payroll funding companies, the business owner has online access to choose which invoices it wants an advance on. Rather than receiving an advance all of its invoices, the business owner can be selective. An added benefit is that some customers will send payment to the payroll funding company while others still payment to the business owner. For customers that the business has a long-time relationship with or for higher-end customers, the business owner may choose to continue billing them directly and not invoice the payroll funding company.
Having customers send payment to the payroll funding company can be a two-edged sword, on the one hand, allowing another company to take over collections frees the business owner up from that task. No more chasing down late payments, sending notices, or processing payment plans.
The flip side is that someone else is collecting payment from your customers. This can make some customers think something fishy is up with the business. If you're going to use a payroll funding service, it's best to be upfront with customers about why the service is being used. At the end of the day, the service basically allows the business to collect payment much faster without affecting the customer.
Payroll funding doesn't necessarily need to be used for paying employees. Some of the advanced funds may be used for cash flow shortages. But generally, companies using payroll funding will use it for meeting payroll.
How Is Payroll Funding Different From Invoice Factoring
Payroll funding may sound a lot like invoice factoring. The main difference between these two is that payroll funding companies offer payroll-related services.
Invoice factoring companies are only focused on taking over creditworthy invoices and advancing payment for them. They don't provide additional services.
Payroll funding companies provide the following additional services:
- Consistent reports on the amount collected, profit, and any issues related to specific invoices. These reports may be generated as frequently as weekly.
- The payroll funding company will take over payroll processing for the business. This means all employees and temp staff receive payment from the payroll funding company.
- Payroll taxes must be taken out of employee paychecks and filed with the correct state and federal reporting agencies. The payroll funding company will complete these tasks.
- Confirmation of payment is sent to each customer once an invoice is paid.
Payroll funding is a great option when other financing channels have been exhausted. As a business owner, you don't have to wait for clients to pay and clients don't need to do anything different except send payment to the payroll funding company. It's a financing option that allows businesses to make payroll and strategically grow.