Rates and Structures

Payroll Funding Costs Explained

For staffing companies new to payroll funding, one of the most important - and sometimes most difficult - concepts to grasp is understanding the all in costs associated with payroll funding. Confusion arises not from the complexity of the transaction, but rather the variability in which rates and costs are structured by payroll funding providers.

In response, PayrollFunding.com provides an overview of the most prevalent rate structures as well as a benchmarking report analyzing current market rates.

Types of Payroll Funding Rate Structures

Three of the most common rate structures seen in payroll funding contracts today are tiered rate structures, net funds employed structures, and daily rate structures.

In order to best explain each rate structure and their differences, we’ll utilize an example of a staffing company that is funding a $10,000 invoice which is paid 31 days after it’s been financed.

1. Tiered Rate Structures

By far the most prevalent structure, tiered rate structures state that the discount rate or fee that a staffing company must pay to its payroll funder increases as an invoice ages. The tiers and rates applied at each tier are likely flexible as well as negotiable.

More often than not, tiers are broken out in 15 day increments with rates increasing between 0.50% and 1.50% at each tier.

Example of $10,000 Invoice Paid on Day 31:

In the tiered structure above, the payroll funding company would apply a discount rate of 2.50% to an invoice paid on day 31.

Total Cost of Financing = $250.00 ($10,000 invoice x 2.50% rate).

2. Net Funds Employed Structure

For many staffing companies, especially those that are interested in a more predictable financing rate, the net funds employed structure is an attractive option. The negative of this structure is the increased complexity which may lead to more confusion and uncertainty of what those costs actually are in terms of dollars and cents.

In the net funds employed model, costs are typically derived from two sources: the interest rate and the service fee (often called a transaction fee).

The interest rate is often stated as a percentage rate plus LIBOR or the current prime rate. The interest rate is then applied to the funds that are borrowed by the staffing company to finance their receivables and fund payroll. The service fee is a flat fee that is applied to every invoice that is funded and typically falls between 0.75% and 1.5% of the face value of the invoice.

These fees accrued by the staffing company are normally settled and paid to the payroll funding company at the end of each month.

Example of $10,000 Invoice Paid on Day 31:

Let’s say a contract states that “the interest rate is equal to two percent (2.0%) plus the higher of the prime rate published in the Wall Street Journal or five percent (5.0%) per annum. Additionally, there is a service fee of 1.0% applied to the face value of every invoice.”

Applying these terms to the invoice and assuming a prime rate below 5% your costs would be: Interest Rate Costs: 5% (the rate floor) + 2.0% (the stated spread) x 31 (number of days the invoice is outstanding) / 365 (number of days in the year) = $59.45

Service Fee Costs: 1.0% * $10,000 = $100

Total Cost of Financing = $159.45 ($59.45 +$100)

3. Daily Rate Structure

Perhaps the rarest of the three rate structures covered, the Daily Rate Structure is typically the easiest to grasp. Amount paid in financing is simply the face value of the invoice multiplied by a stated daily rate multiplied by the number of days the invoice is outstanding.

Example of $10,000 Invoice Paid on Day 31:

Assuming and applying a 0.07% (or 7 basis points) daily rate:

Total Cost of Financing = $217.00 ($10,000 x 31 days x 0.07% daily rate)

Each rate structure has its advantages and disadvantages. However, the most important aspect is not which structure is utilized, but rather ensuring that you have a firm understanding of how your fees and costs are determined by that particular structure.

Interested in learning more about rates and how yours might stack up? Click here to access PayrollFunding.com’s benchmarking report.

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