Payroll funding, or factoring, is a financial tool used by many staffing companies. These businesses are in a unique situation financially. Payroll must be made weekly, but their customers tend to pay in 30-60 days.
Whether you are just starting a new staffing agency, or an unexpected cash flow crunch occurs, payroll funding can provide relief.
Growth is good for any business, Staffing company or not. But with growth comes growing pains. Specifically, financial ones. When you take on a new client, you may need to make payroll 4-8 times before they pay their first invoice.
Financial strain can not only damage your new client relationship; it can lead to staffing shortages with your other customers if you cannot pay your workers. There are many financial products out there, but invoice factoring is the quickest way to fund your staffing company’s payroll.
Using a Payroll Funding Company
Slow paying customers tie up your staffing firm’s capital, and invoice factoring can solve this problem. In most cases, you can get paid within a few days. The process is simple.
Once you have an invoice that you’d like funded, you’ll submit it to the payroll funding company along with any timecards or similar supporting documents. The payroll funding company will then forward you a percentage of the invoice upfront (Usually up to 90%). You’ll now be able to pay your employees when you otherwise couldn’t.
Once your payroll factoring company collects payment on the invoice, they will forward you the outstanding amount minus a factoring fee. Payroll financing fees can vary greatly, but they are usually between 1%-4% per month.
Benefits of Payroll Factoring
Despite the high cost, factoring your staffing company receivables has numerous benefits:
- Provides quick access to funds
- Allows you to grow your staffing firm
- No fixed payments like a loan
- Based on your customer’s credit
- The amount you can finance grows alongside your business
For How Long Should You Factor?
There’s no doubt that factoring is an expensive solution. But if it leads to serious growth for your agency, the cost can be worth it. It’s easy to fall into the trap of factoring for too long, even after it isn’t necessary anymore. This leaves valuable cash on the table, and can actually lead to diminished long term returns.
Most will suggest to use it as a tool to help you start your new business, or in the case of rapid growth. If you must factor your payroll invoices indefinitely, there may be some underlying business problems that need to be solved.
What Are the Different Types of Payroll Funding?
There are different types of factoring, and each one has it’s own benefits. Read more about the different factoring services.
If you are doing business with trustworthy customers with whom you have an excellent working relationship, recourse factoring is a lower cost solution. If you are looking to take on less risk, you may choose to go with a non-recourse factoring agreement. Those are just the two most popular services, and there are many more. You should decide which is right for you before making the plunge.
Related: The Guide to Non-Recourse Factoring
Payroll financing companies provide a valuable service to staffing companies that are both new and old alike. The service can help you meet your weekly payroll obligations while your customers drag their invoice payments to 30-60+ days.