How Does Payroll Funding Work?

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 fulfill your payroll needs through a process known as invoice factoring (accounts receivable factoring).

So how does payroll funding work? Simple.

1. You fulfill your services and invoice your clients as usual.
2. Sell your open accounts receivable to a payroll funding company.
3. 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.
4. 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.