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.