Payroll Funding vs Small Business Loans

A growing economy should be good news for businesses hoping to get to the next level. But, it can actually spell trouble for businesses that are “staff intensive.” That’s because it costs money to staff up and often the capital to pay for it is locked up in outstanding receivables – some 30 to 90 days out. That can be an eternity for a business looking at an opportunity to add a new client or score a big contract. That’s why an increasing number of businesses are turning to payroll funding as a short-term solution to their staffing needs.

What Exactly is Payroll Funding?

Payroll funding is a means of accessing capital to fund the payroll costs of adding new staff. It’s important to know right up front that payroll funding does not involve any type of financing, such as a loan. Payroll funding is a sale transaction that exchanges outstanding invoices for cash. In essence, it is a way to access money already owed to you by your customers without having to wait 30, 60 or 90 days for payment. Here’s how it works:

  • You land a new contract that requires hiring three new people
  • You are still waiting on a payment from an outstanding invoice that would cover the payroll costs
  • You submit the invoice to a factoring company
  • After determining the creditworthiness of the invoiced customer, the factoring company transfers up to 90% of invoice value to your bank account
  • When it collects the payment in full from your customer, you receive the remaining 10% minus factoring fees.

This a turnkey process that can repeat itself as often as you have a need for a cash infusion and an invoice to sell. The initial transfer of money can take as little as a couple of days if the factoring account is new, but, for an established factoring account, it can take just a few hours.

Payroll Funding vs. Bank Financing – Which is Right for Your Business?

Payroll funding is quick and convenient, and it affords businesses a lot of flexibility in how they manage their cash flow. But, it isn’t the cheapest way to access funds. With factoring fees ranging from 1% to 5% per month, payroll funding can certainly be more expensive than bank financing.

For a more established business with a solid operating and credit history, bank financing may be more preferable. Small business loans for qualified businesses can be less than half the cost of payroll funding through a factoring company. One of the downsides of using small business loans it that it can take weeks, sometimes months, to work your way through the loan approval process. It’s not a good solution if you need quick access to capital.

Businesses that experience growth spurts with spikes in hiring can benefit more from a line of credit, which allows them to borrow only as much as they need, enabling them to control their borrowing costs. Once the line of credit is established, the business can go back to it as often as needed.

However, for businesses with less established operating or credit histories, their options for accessing cash are limited. The only real requirement for establishing a factoring account is that the business’s customers have established operating or credit histories with a track record of making on-time payments. As long as the factoring company is confident it will receive an on-time payment from your customer, it will advance the cash.

Businesses Must be Able to Fund Their Growth

The worst thing that can happen to a business in a growing economy is to be held back because it can’t afford the payroll costs of hiring new people. That is less likely to be a problem once the business gets to a point when it can generate sustainable cash flow that grows along with its profits. But, until then, a business must be able to fund its growth even when cash is tight. Payroll funding is straightforward, turnkey solution that accelerates the payment of invoices so the business has the cash on hand to add staff as needed.

If you are growing a business, you can’t afford not to know more about payroll funding so you can determine if might be the best solution for your needs. You can browse payroll funding companies by your state, or request a quote here and we’ll match you with the best provider for your business.

Choosing the Right Payroll Funding Provider

A key indicator of a growing economy is the increasing pace at which companies are hiring new staff and a by-product of a robust job market is the growth of payroll funding companies. Why? Because payroll is often the largest operating cost for businesses, which often have to front these costs until the revenue from new business rolls in which could be two to three months after the work is completed.

That’s where payroll funding comes in – where businesses can exchange 30- to 90-day invoices for an infusion of cash today.

An increasing number of businesses are catching on to the benefits of payroll funding, which is driving the growth in that industry. The challenge for businesses is there are dozens from which to choose and, as if the case in any fast-growing industry, not all payroll funding providers are the same. Some may specialize in specific industries, some operate only as middlemen between funding sources and their customers, and some aren’t very transparent with their fees. So, how can a business quickly narrow down the choices to one or two payroll companies that are right for their particular needs? By asking the right questions.

Here are 5 of the most important questions to ask of a payroll funding provider along with the red flags that might pop up in their answers.

What is the payroll funding provider’s reputation?

It’s your money so, there’s nothing more important than the reputation and integrity of the financial institution you choose to work with. Stay away from companies that haven’t been around long enough to establish a reputation – less than 10 years. Do a deep dive into their background on Dunn and Bradstreet and eliminate any company that doesn’t have at least an A+ rating with the Better Business Bureau. Google around for company reviews and red flag those with more than a few bad reviews.

Does the payroll funding provider understand your business/industry?

Payroll funding providers are also referred to as invoice factoring companies because it is a form of invoice factoring. But, if it is an invoice factoring company that dabbles in payroll funding, you may not be getting the experience and expertise needed to serve your particular payroll needs. A good payroll funding company understands the challenges of meeting payroll and has the capacity to adapt its process to your process for a more seamless and responsive funding relationship.

 Does the payroll funding provider charge competitive rates and fees?

If a payroll funding provider is a real player in the industry, it should offer competitive rates. But there are a number of factors involved in determining rates and total costs. While the price is an important consideration, you need to carefully scrutinize the terms of the agreement where you might find hidden fees, mandatory minimums, and volume requirements. A provider may offer a very competitive factoring rate but then layer on a lot of additional charges, such as application fees, monitoring fees, and processing fees. It may be better to go with a provider that charges a slightly higher rate if they have minimal or zero additional charges.

How quickly can invoices be funded?

The whole reason for working with a payroll funding provider or any invoice factoring company is you need reliable access to capital in near real-time. Generally, once you have a relationship with a provider, funding can be approved and delivered within a day, sometimes within hours. It may take up to two or three days for your initial account and approval, but the process should be fairly turnkey after that.

Is the payroll funding provider affiliated with a bank?

Many payroll funding companies operate as middlemen between their funding sources (typically a bank) and their customers. As such, they have to pass their borrowing costs onto their customers. Also, the process can be slowed by the extra steps needed to transfer funds from the bank to the middleman to you the customer. Some payroll funding companies are bank-owned or associated with a bank where they have direct access to the bank’s funds. This not only cuts down on the cost of funds, but it can also accelerate the process for quicker delivery of funds.

As you begin your search for the right payroll funding company, use the answers to these questions as your guide. The more you understand what’s important for a successful relationship with a payroll funding company, the more control you’ll have over the process.

We invite you to start your search at where you can search for companies by state.


Is Payroll Funding a Fit

As the pace of hiring picks up in the economy, an increasing number of businesses are facing the challenge of keeping up with payroll costs. A growing business needs to add staff to handle the increasing demand for its products or services. However, in many cases, it must cover the additional payroll costs while waiting 30 to 90 days for payment from its new customers.

If its current cash flow isn’t sufficient to cover payroll costs, it could have to reduce its staff – creating a perpetual cycle of one step forward and two steps back. That’s no way to grow a business.

For businesses in that situation, payroll funding may offer the ideal solution. With payroll funding, a business doesn’t have to wait 30 to 90 days to cover its current payroll costs. As soon as the invoice is sent to the customer, it can also be exchanged with a payroll funding company, also referred to as an invoice factoring company, for immediate cash up to 90% of the invoice’s value. Once the payroll funding company collects the payment, it transfers the balance to the business minus fees. It’s a straightforward transaction offering quick access to capital, but payroll funding may not be for everyone.

What Makes Payroll Funding a Fit for Your Business?

The types of businesses that can benefit most from payroll funding typically experience erratic staffing needs, in which cash flow can be an issue if it can’t keep pace with payroll costs. This is true for fast-growing startups or seasonal businesses that need to ramp up quickly for bursts of business activities. It is especially true for staffing companies whose sole business objective is to hire contract workers.

In fact, any business that is growing at a faster pace than its cash flow is a candidate for payroll funding. It typically means the need for more staff, which increases payroll costs, exceeds the amount of cash flow coming in at the time as the business waits for payment from the customer.

If you want to know if payroll funding is a fit for your business, ask yourself the following questions:

Are you in a staffing intensive industry?

If you’re in the staffing industry, there is no question payroll funding is a fit for your business. But any industry that is experiencing rapid growth and is staffing intensive may be a candidate for payroll funding. For businesses, such as seasonal businesses, that need to staff up quickly, payroll costs can be their biggest overhead expense, requiring a quick infusion of capital. For staffing companies experiencing rapid growth, payroll costs are their biggest expense and the can’t afford to get caught short when the opportunity to add a new customer arises.

Are you facing a cash crunch?

The good news is a cash crunch, by definition, only temporary. The bad news is, for certain types of businesses, they tend to come around often. Your business may be able to stave off one cash crunch, but if it is the nature of your business due to fast growth or seasonal swings, you can expect them to come around again and again. Having a reliable source of capital for quick cash infusions can help to smooth out the cash flow between invoices.

Does your business have a limited operating history

Unless your business is well established with a fairly long operating history, you most likely cannot qualify for a traditional bank loan or line of credit. Payroll funding companies will work with less established companies because they rely on your customers’ operating history to determine if it has the ability to pay their invoices on time.

Does your business have below average credit?

Payroll funding does not involve loan financing – it’s a sale transaction exchanging invoices for cash – so there is no need for the payroll funding company to check your business credit. As long as your customers are financially stable with good credit histories, your payroll funding is likely to be approved.

Is your business adding new accounts faster than its ability to cover costs?

It’s a common paradox for growing businesses. It takes money to make money. Growing businesses typically outrun their cash flow, which makes it difficult to add the staff necessary to sustain their growth. Until they can build their working capital account, businesses have to rely on periodic infusions of cash to meet their needs. Because payroll funding relies on payments already owed to your business, you’re simply accessing your own cash, in advance.

If you answered yes to one or more of these questions, payroll funding may be a great fit for your business. You can learn more about the process by searching our state-by-state directory for payroll funding companies.

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.