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 financing, 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.