Payroll funding, also called invoice factoring, is a form of financing specifically designed for the staffing industry. Many staffing companies must wait 30-90 days to collect payment on invoices, but need to make payroll far sooner. By selling your receivables for money up front, you can achieve steady cash flow and sustainable growth. Check out our online resources or contact us to find out more about finding the right provider for you.
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Making payroll for your company is one of the most important jobs as a small business owner. If you can’t make payroll, you risk losing employees, stifling growth and potentially going out of business.
Having enough cash on hand to make payroll is a problem that many businesses struggle with, even if they have stable customers who pay their bills on time.
Unfortunately, “on time” can mean 30-90 days after an invoice is submitted, leaving the business owner behind schedule and low on cash reserves all too often. Although your business will eventually collect on those invoices, you don’t have time to wait because you need to pay your employees now. While there are traditional funding options for a small businesses (i.e. bank loans or investments), many companies do not have the assets to borrow against, the credit score, or the operating history to get access to a line of credit. That’s where payroll funding becomes your best option.
Payroll funding is the act of selling your accounts receivable for cash up front. Also known as invoice factoring, it is a form of financing specifically designed to help staffing companies make payroll before they collect from their customers. When you submit an invoice to a customer, the payroll funding provider purchases that unpaid invoice from you and gives you the cash that day. Once your customer pays the invoice, the provider sends you the rest of the money, minus their fee. With that cash in hand, you can achieve steady and sustainable growth.
Ultimately, payroll financing allows business owners to better match the cash outflows associated with payroll to the cash inflows and billings generated by those employees during that pay period.
Payroll funding essentially turns one asset (an invoice or receivable) into another (cash). In its simplest form:
In a typical relationship, there are three direct players and (in many cases) one indirect entity involved. They are:
*If the payroll funding provider is a bank itself, there is no need for a fourth participant or additional borrowing.
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, many providers don’t necessarily do a great job of stripping away these uncertainties. That’s why choosing the right provider is critical.
The staffing company operates as “business-as-usual” – providing labor to its customers based on the agreed upon terms and pricing. Payroll financing does not aim to disrupt your typical business cycle or process.
NOTE: Only after the hours have been worked can the payroll be funded. 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.
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 lock box held by the Payroll Funding Provider or to the Provider’s bank account.
After invoicing their customer, the staffing company may present the invoice to the payroll finance company. The 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 lock box or bank account, per the usual terms outlined in the invoice.
Once payment is received, the financing company releases the remaining 10% owed to the staffing company minus the provider’s fee (typically 1-5%). This is referred to as a “reserve disbursement.”
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 providers that offer invoice-by-invoice distributions. This will increase your staffing business’s cash flow faster, allowing more steady and predictable growth.
As a form of specialty financing, payroll funding may not be a fit for all businesses. In particular, staffing companies that have flat growth and long-established operating histories may prefer to tap either traditional forms of credit or to self-finance their working capital.
Typically, invoice factoring is utilized by small and mid-sized staffing firms (also known as staffing factoring) that are either experiencing one or all of the following:
Long-story short, if you’re a small or mid-sized staffing firm that would like to smooth out cash flow, invoice factoring is likely a solution.
What are all the advantages of payroll funding?
The primary benefit of payroll funding is increased liquidity which allows temporary staffing company owners to meet payroll, invest in new projects, grow sustainably, and generally sleep better at night. Other benefits include:
How much does it cost?
There are typically two sources of costs when evaluating a relationship. The first source is the discount rate (think of this as interest rate) and the second is fees. Fees can vary wildly and may include transaction fees, lockbox fees, application fees, etc. If you see these fees in your agreement, move on and find a more straightforward funding provider.
In regards to discount rate, pricing can range from under 1% of the face value of an invoice to upwards of 5%. Rates are determined by the staffing company’s volume of business, the credit quality of its customers, and the length of time it typically takes for customers to pay.
As an example, the average staffing company billing $850,000 a year with customers paying in 31.3 days paid a discount rate of 2.76% on the face value of their invoice. So for a $10,000 invoice that was outstanding for 31.3 days, the staffing company was charged $276.
Get an in-depth look at the industry with and our latest pricing and benchmarking report.
What should I look for in a payroll funding solution?
First and foremost, you should look for someone you can trust. A good financing company can act as a catalyst for growth. A bad one…well, it can put your company in jeopardy.
On the surface, cost may seem to be the most important concern when evaluating partners. While cost should absolutely be considered, it’s how your payroll funding company interacts with your staffing company’s customers that should be the primary focus.
How are collections handled? What will your account team look like? Do they understand staffing? What’s their reputation? Do they also handle payroll processing?
By working with an established funding partner or an FDIC member bank that offers payroll funding, you’ll have more comfort in your partner’s ability to complement your business goals.
For more information about what to look for in a partner, access our guide to choosing a provider.
I’m a startup, does it make sense for me?
Yes! In fact, payroll funding is in many ways the ideal financing solution for a new or relatively young staffing company.
While not all financing companies will work with a startup, most will be able to refer you to a partner who will. Also, if you or other principals have extensive staffing experience or contracts ready to go, most companies will work with you to structure a financing arrangement that makes sense for all parties.
What will my customers think?
Payroll funding and other alternative financing platforms have been around for decades (and even centuries in some cases). As such, customers, their accounts payable departments, and their project managers are more than likely very familiar with payroll funding relationships.
As customers have moved towards stretching their suppliers’ payments out, customers’ familiarity with alternative financing companies has increased as the need for cash flow solutions has risen as well. Assuming you’ve got the right partner in place, most customers will see the financing relationship as only strengthening the financial viability of their own supply chains.
What do I need to get started?
Every factoring company has its own unique process for approval, but to get started, most just want to get a better understanding for your business, your customers, and what sort of financing line you may need.
Payrollfunding.com is not only a resource center, but we also help match staffing companies with a financing partner that fits their business needs.
Want to find out more about potential solutions? Get started with a quote today.
When do I get my money?
Once you’ve been approved for funding (sometimes within one business day) and you’ve submitted your unpaid invoices to the provider, you receive 80-90% of the invoice value immediately in cash. The remaining 10-20% is transferred to you once your customer pays their invoice, minus the provider’s fee. It’s that simple!
