Most growing businesses face the similar conundrum of preventing expenses from outpacing 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. To mitigate this challenge, it’s common for staffing agencies to turn to payroll funding.
Understanding the payroll funding benefits early can help agencies decide whether this type of financing fits their growth plans.
Payroll funding allows staffing agencies to take on new business without worrying if their cash flow can keep up with the added expenses that comes with new business. Considered an alternate form of financing, payroll funding is a quick and reliable source of capital needed to meet growing payroll demands.
If this sounds like something that would help your staffing agency, continue reading to learn more about this unique alternative financing solution so that you can decide if payroll funding is a fit for your business.
How Does Payroll Funding Work?
Payroll funding, also known as invoice factoring for staffing agencies, is a well-established form of alternative financing where staffing agencies exchange unpaid invoices for an immediate cash advance.
First, a staffing company submits unpaid invoices to a payroll funding company, who then takes on the responsibility for collecting payment. The staffing company immediately receives up to 90% of the invoice value (typically within 24-36 hours) after submitting the invoice. Once the customer submits payment to the payroll funding company, any remaining funds are released, minus a small factoring fee (0.75-3.50%).
While payroll funding can be an effective way to overcome short-term cash flow challenges, it’s important to understand both the upside and the trade-offs. The following section outlines the primary advantages of payroll funding, particularly for staffing agencies that need to pay employees before customer invoices are collected.
Advantages of Payroll Funding
Here are some of the most well-known benefits of payroll funding:
Straightforward Application and Approval Process
Payroll funding typically involves a simple application with minimal documentation. Many providers focus on invoice and customer information rather than long financial histories, which speeds up approval.
Funds Accessible Within 24 Hours
Once approved, funds are often available within one business day. This makes payroll funding a practical option when payroll deadlines are approaching quickly.
No Credit Minimum Required
Most payroll funding providers do not require strong business credit. Instead, approval is based largely on the creditworthiness of your customers rather than your company. This makes it a fantastic alternative to traditional bank loans.
Low Risk Funding Solution Since No Debt Is Incurred
Payroll funding is not a loan, so it does not add debt to your balance sheet. Because invoices are sold rather than borrowed against, it does not affect credit scores or debt ratios.
Can Be a Short- Or Long-Term Solution
Payroll funding can be used temporarily to cover short-term cash flow gaps or as an ongoing solution to smooth cash flow. Businesses can typically use it only when needed.
Payroll Funding Companies Assume Collection Responsibilities
With payroll funding, the provider typically handles invoice payment collection directly from your customers. While this can reduce administrative work for your business, it also means a third party is interacting with your customers, making it important to work with a provider that manages collections professionally and carefully.
Disadvantages of Payroll Funding
Before committing, staffing agencies should also consider the potential disadvantages of payroll funding, particularly as they relate to cost and choosing a provider.
Debtors Must Have Adequate Credit History to Qualify
Approval depends heavily on the credit quality of your customers. If your customers have poor payment histories, payroll funding may not be an option.
Does Not Eliminate Risk of Customer Non-Payment
In many cases, the business remains responsible if a customer fails to pay the invoice. Payroll funding improves cash flow timing but does not always remove credit risk.
Funding Fees (0.75–3.50%) Can Slightly Cut into Profit Margins
Payroll funding fees can reduce overall margins, especially for companies with tight profit spreads. While the cost may be manageable, it is often a bit higher than traditional bank financing.
Independent (Non-Bank-Affiliated) Payroll Funding Companies Can Be Shady
Not all providers operate with the same level of transparency. Some may include hidden fees or unfavorable contract terms, making it important to carefully review agreements and choose reputable partners. Prioritize finding a payroll funding company that is affiliated with a bank and federally regulated to begin your search.
In-Summary: Payroll Funding Pros and Cons
If you’re weighing whether or not to move forward with working with payroll funding, consider the following advantages and disadvantages:
| Pros of Payroll Funding | Cons of Payroll Funding |
| Straightforward application and approval process | Does not eliminate risk of customer non-payment |
| No credit minimum required | Funding fees (0.75-3.50%) can slightly cut into profit margins |
| Low risk funding solution, since no debt is incurred | Debtors must have adequate credit history to qualify |
| Funds accessible within 24 hours | Independent (non-bank-affiliated) payroll funding companies can be shady |
| Can be a short- or long-term solution | |
| Payroll funding companies assume collection responsibilities |
In-Summary: Benefits of Payroll Funding
For staffing agencies managing rapid growth and delayed client payments, payroll funding can be a practical way to stabilize cash flow and ensure employees are paid on time. It allows agencies to accept new contracts without waiting weeks or months for invoices to be paid. When used thoughtfully and with the right provider, payroll funding can support steady growth without adding debt or unnecessary financial strain.
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.