How Does Payroll Funding Work?
The employees are the core of any business operation, which is why ensuring they are paid on time is vital to your company’s growth and success. Payroll funding is a simple financing solution that gives your business access to the cash flow needed to not only pay your permanent or temporary staff but to pay them on time.
What Is Payroll Funding?
A business’s cash flow will fluctuate constantly; however, expenses don’t stop accruing just because your working capital is limited. Also known as payroll financing, payroll funding allows you to sell your accounts receivable for instant cash to fulfil your payroll needs through a process known as invoice factoring (accounts receivable factoring).
So how does payroll funding work? Simple.
- You fulfil your services and invoice your clients as usual.
- Sell your open accounts receivable to a payroll funding company.
- The payroll financing company will advance you a percentage of the total invoice value (usually up to 90%). This is known as the advance rate and is the instant capital you need to cover your payroll responsibilities. The remaining balance (10%) is kept as a reserve until your clients settle their invoices.
- Once your customers pay their invoices in full, the payroll funding company will reimburse you the remaining invoice balance minus a small factoring fee.
As opposed to traditional loans or lines of credit, which require strong credit histories, minimum revenue requirements, and numerous other hurdles to jump through to get approved, payroll funding is much easier to get approved for. Instead of focusing on your business or personal credit history, the payroll financing provider is more concerned with the creditworthiness of your customers. So, if your customers have a history of paying their outstanding invoices on time, you have no liens against your open invoices, and you have good invoicing practices, your business could qualify for payroll funding.
How Much Does Payroll Funding Cost?
The cost of payroll funding will differ depending on the company you choose to factor your invoices through.
Different invoice factoring companies will offer different advance rates (usually between 80% and 95%) and factoring fees (typically between 1.15% and 3,5% per 30 days).
Some variables that could affect your cost of payroll funding include:
- How much you are billing on a monthly basis
- The volume of invoices you plan to factor
- What industry you are in (staffing, manufacturing, trucking, healthcare, etc.)
- The creditworthiness of your customers.
Advantages of Payroll Financing
- Your business gets instant access to consistent cash flow
- Once you have been approved, funding is available almost immediately – generally within 24-48 hours.
- Unlike traditional loans, there are no hidden charges involved.
- With fewer worries, your company can focus on taking the next steps in its growth. You can hire new staff and fulfil more client orders while improving the retention rate of your current staff.
- Applying for a bank loan is a lengthy and complicated process, and most small businesses will be unable to meet the approval requirements. However, with factoring, approval is simple and much less stringent.
- Invoice factoring is a business transaction where you are selling your invoices to a factoring company. This means that factoring will not appear on your balance sheet as a liability, nor will it negatively affect your credit score because you are not creating debt.
- This financing option is flexible and will grow as your business grows. As long as you have creditworthy clients, you can typically factor as many invoices as you need to.
Kore Capital Corporation specializes in providing short-term working capital solutions to growing businesses. If your company is struggling to qualify for traditional bank financing, contact us today to find out more about our payroll funding, invoice factoring, and asset-based lending programs.