On the surface, payroll funding might be perceived as a complex financing solution. Obscure terms, pricing structures, and processes may cause undue anxiety for a staffing owner that is simply trying to infuse his or her company with more cash. Unfortunately for the staffing entrepreneur, payroll funding providers don’t necessarily do a great job of stripping away these uncertainties.
PayrollFunding.com aims to simplify the transaction with its primer on how payroll funding works.
In a typical payroll funding relationship, there are three direct players and (in many cases) one indirect entity involved. They are:
The Staffing Company
The Staffing Company’s Customer
The Payroll Funding Provider
The Payroll Funding Provider’s Bank (indirect participant)
Payroll Funding Steps
Step 1: Service Delivery
The Staffing Company operates as usual – providing labor to its customers based on the agreed upon terms.
NOTE: Only after the hours have been worked can the payroll be funded by the Payroll Funding Provider. Attempting to finance a payroll or sell an invoice where work is yet to be performed is called “pre-billing” and is generally not permitted by Payroll Funding Providers.
Step 2: Billing
After work has been performed, the Staffing Company invoices the customer in its normal fashion; except that the Staffing Company changes the “remit to” instructions for the customer.
When a payroll financing relationship is established, the Staffing Company amends its payment instructions and tells customers to either remit payment to a lockbox held by the Payroll Funding Provider or to the Payroll Funding Provider’s bank account.
Step 3: Sale of Invoice
After invoicing their customer, the Staffing Company may present the invoice to the Payroll Funding Provider. The Payroll Funding Provider then “purchases” the invoice or advances typically 90% of the invoice’s face value. The remaining 10% of the invoice face value is placed in what is known as a “reserve account.”
This advance infuses the Staffing Company with cash 24 – 48 hours after an invoice has been presented for sale. With a wire fee, a Staffing Company can often even receive money same day if so desired.
Per the instructions provided by the Staffing Company and as outlined on the invoice, the Staffing Company’s Customer remits payment directly to the Payroll Funding Provider’s lockbox or bank account, per the usual terms outlined in the invoice.
Step 5: Reserve Disbursement
Once payment is received, the Payroll Funding Provider releases the remaining 10% owed to the Staffing Company net of the Payroll Funding Provider’s fees.
The frequency with which these distributions are made from the reserve account vary and may be monthly, weekly, or on an invoice by invoice basis. Avoid monthly distributions and seek out Payroll Funding Providers that offer invoice by invoice distributions as this will increase your staffing business’s cash flow.
Want to Learn More?
While each Payroll Funding Provider may use their own terminology, the transaction typically mirrors the five steps presented above. Questions? Contact us today and we’ll put you in touch with one of our partners who can answer any lingering questions.