What is Payroll Funding? Understanding Staffing Factoring

In the staffing industry, it is paramount to have consistent cash flow to achieve success. However, more often than not, ensuring that cash is available to make timely payroll can feel like a continuous tightrope walk for staffing companies and temp agencies. The challenge is bridging the gap between client payments, which often lag, and the steady cash stream needed to meet your employees' wages. Delays can hinder growth, strain morale, and even jeopardize your reputation. That's why payroll funding is a lifeline for many businesses in this sector.

Contents

• What is Payroll Funding?
• How does payroll Funding work?
• What are the benefits of payroll funding?
• How Fast is the Money Available from Payroll Funding?
• What types of Payroll Funding are there?
• What is the cost of Payroll Funding?
• Is Payroll Funding Right for Your Business?
  
  

What is Payroll Funding?

Payroll funding, also known as staffing factoring, payroll financing, or invoice factoring, is a financial tool that allows companies to sell their outstanding invoices to a financing company in exchange for immediate cash. This cash advance, typically 80% to 90% of the invoice value, can cover payroll obligations, operational expenses, and growth initiatives. In essence, you're converting an asset (an invoice) into readily available cash so that you can think of it as an advance on your account receivable.

Even though traditional funding solutions are available – such as bank loans or investments – banks often fail to realize the industry dynamics, lacking flexibility and taking a long time to respond to staffing businesses' needs.

Also, not all companies have the assets required as collateral, the credit score, or the operational history to secure a line of credit.

Payroll funding is faster, and the factor doesn't have to evaluate your credit score; it evaluates your clients. That's why it comes as the best solution for immediate cash flow.

How does payroll Funding work?

1. You'll grow at the speed of your sales, not your financial capacity, as the factor checks your clients and prospects' financial trustworthiness for you, such as payment history, industry reputation, and credit score, instead of yours.
2. You can choose the clients whose invoices you want to factor.
3. Upon approval, the factor signs you up. The time may vary according to the factor, but in Summar, for example, we set you up in 7 business days max.
4. Once everything is in order, you submit your invoices, and the factor advances you a percentage of the invoice value, usually within 24 to 48 hours.
5. The factor collects the payment from your client and deposits the remaining balance (minus fees) to your business, settling the transaction.
   
   

What are the benefits of payroll funding?

Attracting and retaining skillful and talented staff is one of the top priorities for any staffing company. However, irregular payments will drive them away and affect your overall reputation in the market. Timely payments are a must, and a financing solution that doesn't involve credit lines or debt can be the advantage you need to come on top of your competitors when facing prospective talent or clients. Payroll funding can provide your company with the following:

• Cash Flow Stability
  By converting outstanding invoices into immediate cash, payroll funding ensures a steady stream of funds to meet payroll and other business expenses. You'll be able to avoid high-interest short-term loans and maintain good credit standing by accessing your own resources ahead of time.
  
  
• Growth Opportunities
  Pursue new contracts, expand operations, and invest in marketing and talent acquisition without worrying about payroll burdens and incurring debt.
  
  
• Enhanced Competitiveness
  Offer competitive employment packages, attracting and retaining top talent. Also, pursue new clients, not worrying if you'll have access to the extra funding needed to serve them.
  
  
• Flexibility
  Unlike traditional loans, payroll funding is fast and not debt-based, meaning it doesn't appear as a liability on the balance sheet. This provides flexibility in managing financial obligations and leveraging assets.
  
  
• Focus on Core Operations
  With the burden of collections and cash flow management lifted, businesses can focus on their core competencies and strategic initiatives.
  

How Fast is the Money Available from Payroll Funding?

Payroll funding offers rapid access to cash, typically within 24 to 48 hours of submitting eligible invoices to the factor. This expedited funding timeline allows businesses to meet urgent payroll obligations and seize time-sensitive opportunities. By leveraging factoring services, your company eliminates the need to endure lengthy processing periods typical of traditional bank financing, meeting vital financial needs without unnecessary delays.

Types of Payroll Funding:

• Recourse Factoring
  In recourse factoring, the staffing company retains responsibility for unpaid invoices if the client fails to pay within a specified period. This option offers lower fees but carries higher risk.
  
  
• Non-Recourse Factoring
  Non-recourse factoring absolves the business of liability for unpaid invoices due to client insolvency or default. While offering greater risk protection, this option typically entails higher fees. Also, the extent of coverage can vary depending on the factoring company you choose to partner with.
  
  

Cost of Payroll Funding:

The cost of payroll funding varies depending on aspects such as the volume of invoices, the creditworthiness of clients, the factor's fee structure, and the type of factoring you are contracting. Typically, factors charge a discount rate or fee based on the invoice value and the duration until payment. While the cost of payroll funding may be higher than traditional financing options, its benefits in terms of flexibility, accessibility, and risk mitigation often outweigh the expenses.

Is Payroll Funding Right for Your Business?

Not all businesses are equal, especially in staffing, where many industries are served. Before diving in, consider whether it aligns with your business needs and financial situation. Here's a framework to help you decide:

• Business Stage
  Payroll funding is particularly beneficial for startups and small to medium-sized businesses with inconsistent cash flow or limited access to traditional financing.
  
  
• Seasonality
  Businesses experiencing seasonal fluctuations in revenue can benefit from the flexibility of payroll funding to bridge gaps in cash flow.
  
  
• Growth Plans
  If your business is poised for growth but constrained by cash flow limitations, payroll funding can provide the necessary capital infusion to fuel expansion.
  
  
• Client Base
  Businesses with creditworthy clients and a stable portfolio of invoices are well-suited for payroll funding.
  
  

Payroll funding can be valuable for businesses struggling with cash flow gaps. Understanding its advantages allows you to leverage factoring and integrate it into your financial strategy. With the right approach, payroll funding can empower your business to navigate cash flow challenges, ensure timely payroll, and unlock growth opportunities.

More than just a funding solution, Summar is your strategic ally for growth.