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.