Payroll Challenges

You know the economy is booming when businesses are stepping over themselves to hire new people. The challenge for smaller, growing businesses is when their hiring outpaces their payroll – meaning they need more hires than they have the resources to pay them on time.

Without access to a reliable source of funding, businesses must forego taking on new business, which can make it difficult to survive in a competitive environment.

Think of it this way: Your business gets a new customer or an unexpectedly big order and you need to hire additional staff to handle the additional workload. You hire three people today who expect to be paid in two weeks, yet the customer expects to pay you on 30-day terms. Where does the money come from to cover the payroll while you wait for payment from the customer? If you can’t find it you either lose your new employees or a customer – neither of which a growing business can afford to do.

Staffing Companies are Particularly Challenged

Staffing companies, which are responsible for fueling the economy to the tune of 17 million workers, face this dilemma week-in and week-out as they try to grow their businesses. In addition to meeting the payroll needs of the business, staffing companies must be able to cover employment taxes and the cost of compliance with regulations. When they get a new client, they must be able to cover these costs for up to two months before they receive the revenue from the new client. If the cash is not in reserve, the company must be able to access a source of funding and traditional bank financing is usually not an option for less established companies with fluctuating cash flows.

Meeting the Challenge with Payroll Funding

That’s why growing staffing companies often turn to payroll funding to smooth out their cash flow. It’s not a loan, so there’s no credit qualification and there’s no need to carry debt. As another form of invoice factoring, it’s more like an advance on the revenues expected from the invoices issued to their customers. Instead of struggling through weeks of waiting for payment, staff companies can access the cash immediately to cover their operating costs with room to staff up if another client comes on board.

The challenge facing most staffing companies is the business can be unpredictable, making it difficult to manage current cash flow while planning for future growth. Because payroll funding using invoices, its quick and easy to set up (approval and funding within two days), and it doesn’t require a business to have an established financial or credit track record (it relies on the financial strength of the invoiced customers), staffing companies can access it at their time of need to address any number of challenges:

  • To quickly ramp up for a new client
  • To meet demand during hiring spikes
  • To ramp up for seasonal or temporary employee hiring
  • To deal with unexpected over-staffing
  • To cover the costs of miscalculating payroll taxes

Why Use Payroll Funding

There are several reasons why payroll funding is often the best financing option for staffing companies:

Just-in-time funding:

No long application and approval process. Set up an account and receive approval and funding within one to two days.

No credit or financial requirements:

Payroll funding companies rely on the financial strength of invoiced customers for funding approval.

No debt to carry:

Payroll funding is based on a sale transaction – exchanging unpaid invoices for a cash advance.

Offer competitive terms:

The payroll funding company takes over the responsibility of collecting payment on the same terms offered to the customer.

Focus resources on growing the business:

Because the payroll funding company takes on the workload the staffing company can focus more of its resources on growing the business.

While payroll funding is not an inexpensive form of financing, staffing companies can control their costs by using it only as much as it’s needed, paying between 1% and 5 % of the invoice amount as a fee.

Almost without exception, growing businesses need to access capital at some point if they want to get to the next level. For small- and medium-sized staffing companies, the need for capital can arise periodically when their expenses temporarily outpace their cash flow. That’s normal for a growing business.

To learn more about partnering with a payroll funding company to grow your business, go here where you can also search for payroll funding companies in your state.

Payroll Funding for Startups

Most growing businesses face a similar conundrum – how to keep their expenses from outpacing their revenue, particularly when it comes to adding staff. New hires expect to be paid within a couple of weeks, but the revenue from a new client or expanding orders could take up to a couple of months depending on invoicing terms. That’s enough to keep many businesses from seeking or accepting new opportunities.

The challenge is especially big for staffing companies because hiring staff is what they do. The only way they can grow their business is by taking on new clients who need them to hire staff. But, staffing companies have to be able to pay their new hires while they wait for payment from their customers. That’s where payroll funding comes in – as a quick and reliable source for the capital needed to meet growing payroll demands.

What Exactly is Payroll Funding?

Payroll funding, also known as staffing factoring, is a well-established practice of exchanging cash for unpaid invoices. A staffing company submits unpaid invoices to a payroll funding company who then takes on the responsibility for collecting payment. The staffing company receives up to 90% of the invoice value within a day or two of submitting the invoice and then receives balance when the customer pays the invoice in full. The payroll funding company holds back between 1% and 5% for its fee.

While it can be the ideal solution for overcoming temporary cash crunches, payroll funding does have its pros and cons. As long as staffing companies fully understand their needs as well as the advantages and the disadvantages of payroll funding, it can be the best option for getting the cash infusion they need to grow their business.

Payroll Funding Pros

Easy, straightforward process:

A quick online application typically results in approval and funding within a day or two.

No financial or credit requirements:

Companies needing payroll funding do not need to have established credit or a long operating history. Payroll funding companies rely instead on the financial strength of the companies being invoiced.

No effect on your credit:

There is no lending involved. Payroll funding is a sale transaction, so it’s not reported to the credit bureaus and it won’t affect your debt-to-income ratio.

Keep offering competitive terms:

The payroll funding company collects payments based on the original invoice terms, whether it’s 30, 45, 50 or 60 days.

Short- or long-term solution:

Depending on your needs, payroll funding can be used to address short-term cash flow shortages or on an ongoing basis just to smooth out cash flow. Once you establish a payroll funding account, it can be used as needed.

Payroll Funding Cons

More expensive than traditional bank financing:

Until your company is in a position to qualify for lower cost loans or lines of credit, you will pay a higher rate for payroll funding. However, with payroll funding, you can control your funding costs by only submitting invoices as needed unless your provider has mandatory minimums.

Mandatory minimums:

Some providers require a minimum invoice amount to be submitted monthly. This can increase your costs if you don’t need funding on a regular basis. This can be avoided by working with providers who don’t have mandatory minimums.

Possible harm to customer relationships:

Because the payroll funding company performs payment collection on your behalf, there is the potential for upsetting customer relationships. High-quality providers are especially careful in their interaction with customers and can actually enhance relationships.

Not all payroll funding companies are alike:

Finding a quality payroll funding company can be a daunting task. There are dozens to choose from and some are known for shady practices, like burying fees in their contracts, or poor quality service.

With Due Diligence You Can Accentuate the Positive and Eliminate the Negative

Any important financial alternative is going to have its pros and cons. The key is understanding your business needs and circumstances enough to weigh them objectively. But there’s something else to consider. With the pros listed above, what you see is what you get. However, except for the fact that payroll funding is more expensive than traditional bank financing, you have the ability to minimize or eliminate the possible negatives. With some due diligence, you can avoid providers that require mandatory minimums or that engage in shady practices, or that provide subpar customer service.

Now that you know what to look for, you can ask the right questions. And always read the fine print before signing any agreements. To help you in your search for a payroll funding company, browse your options by state.

Payroll Funding for Staffing Companies

A growing economy lifts all boats, but staffing companies, in particular, can thrive on the increasing demand by companies to outsource their hiring. However, as with any type of business that experiences spikes in customer demand, staffing companies are prone to capital shortfalls, which can hinder their ability to grow.

Payroll funding for staff can be especially challenging for staffing companies that often have to wait up to 60 days for payment from a new customer while having to pay salaries, employment taxes and other expenses associated with adding staff. If they don’t have enough working capital, they can’t afford to take on new customers, making it difficult to grow their business.

So, where does a growing staffing company turn to keep working capital flowing while adding new customers? Traditional bank financing is typically out of the question for any business without established credit or assets and more predictable cash flow. For many smaller businesses, taking on debt is not a practical solution anyway. But, until they have the time to build up a cash reserve of their own, staffing companies need a reliable source of payroll funding for staff.

The Payroll Funding Solution

For staffing companies, the solution for payroll funding for staff is sitting right on their computers in the form of unpaid invoices. As long as a staffing company is working with reliable companies with a track record of paying their invoices on time, its invoices can be exchanged or “factored” with a factoring company for a quick infusion of cash.

Here’s how it works:

A staffing company is sitting on some invoices with 30- to 60-day terms but it needs a cash infusion to meet its payroll for recent staff hires. The company establishes an account with a factoring company and submits the invoices it wants to factor. The factoring company does a quick background check on the staffing company (no credit check) and reviews the invoices. Factoring companies like working with staffing companies in particular because their invoices are based on hours, which are fairly indisputable when it comes time for collection.

After performing due diligence on the customers being invoiced – to determine the customer is reliable and creditworthy – the factoring company direct-transfers up to 90% of the invoice value to the staffing company, which can use the funds as working capital. When the invoice is paid by the customer under normal terms, the factoring company then direct-transfers the 10% balance, less factoring fees, which can range from 1% to 3% per month.

With an established factoring account, the staffing company can continue to submit invoices as needed for payroll funding for staff.

Why Payroll Funding is Ideal for Staffing Companies

Staffing companies must have a steady flow of working capital if they want to be able to continuously add new customers and the timing is not always up to them.

When presented with the opportunity for a new contract, if the money is not there, they can’t take on the new customer. Most customers expect payment terms of 30- to 60-days. If the staffing company adds staff for a new customer, it must be able to pay them starting within a couple of weeks of hiring. With payroll funding – or factoring – it can invoice the new customer weekly or bi-weekly and have the cash available to meet payroll.

In addition to growing their business while meeting their obligations, the advantages of payroll funding for staffing companies are numerous:

  • Obtain funding without established credit or assets
  • Receive funding within days or even hours after submitting invoices
  • Save time and resources by turning responsibility for collection over to factoring company
  • Does not add debt to your balance sheet
  • Allows you to offer competitive terms to your customers
  • Control funding costs by factoring invoices only when needed
  • The amount of funding can increase as the business grows
  • Allows the staffing company to build its own cash reserve and prepare for traditional bank financing

Working with the Right Payroll Funding Company

Factoring has been around for centuries, so it can be trusted as a viable source of capital. But, for staffing companies, it is important to work with a factoring company that understands the nuances and demands of payroll funding for staff. A factoring company has the customer service infrastructure to make the process as easy as possible, so you can focus on growing your business. Other factoring companies with extensive payroll funding experience include TCI Business Capital and Bayview Funding.

We invite you to use this directory to browse payroll funding companies in your state.