How Payroll Factoring Can Help Your Small Business
If you’re a small business, payroll can be one of your largest expenses. It’s also important to make sure that your employees are paid on time.
Payroll factoring helps you avoid these issues. The company that offers this service purchases your invoices and supplies you with a lump sum amount of cash.
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Many business owners find that they need to take a pay cut or dig into their personal savings in order to make payroll. In these situations, payroll factoring may be a good alternative to help generate cash flow in advance.
Generally, only invoices that are less than 90 days old and are owed by creditworthy customers are eligible for factoring. The factoring company determines these accounts receivable by reviewing a commercial credit report.
The factoring company then advances your business a portion of the eligible accounts receivable – typically 80% to 90%, depending on the risk of each invoice. The factoring company collects the rest of the invoice’s balance when your client pays in full.
Some factoring companies offer recourse transactions, in which the factor purchases the invoices outright and you are not liable for the debt. However, these arrangements can result in fewer payments than non-recourse options and you are still responsible for repaying the factor for any uncollected invoices.
Payroll factoring can provide your company with a reliable source of cash for paying employees, keeping the lights on, and other business needs. However, before you decide to factor your invoices, it’s important to understand how it works and what it costs.
The basic process of payroll factoring involves your staffing agency selling accounts receivable to a factoring company for a fee. The factor advances a percentage of the total amount of your invoices, typically up to 80-90%.
Your customers send their payments to the factor, and then you receive the reserve from the factor — minus their fees — once they’ve paid in full.
It’s a simple process, but one that requires some research to find the right payroll factoring provider for your business. Look for a factor that understands your business model and has a reputation for working with small businesses like yours. This will ensure that your account is handled efficiently and that you’re getting the funding you need.
One of the most important things a factoring company can do for your business is help you get paid quicker. This means allowing you to make strategic hires, purchase equipment, and take advantage of new business opportunities before your client pays their invoice.
The best payroll factoring companies have easy-to-use interfaces that allow you to upload your unpaid invoices, receive funding in as little as 24 hours and keep track of the status of your funded invoices with their intuitive online portals. They may also be able to provide you with a mobile app or other tools that can help make your job easier.
If you are considering a factoring company, be sure to read through the contract carefully. This will help you avoid signing up for a service that isn’t worth your time and money. Moreover, pay close attention to any additional fees that they charge you. These can often be hidden in the fine print and add up quickly.
In most cases, payroll invoice factoring provides a fast and easy way for businesses with long net terms to receive cash flow earlier than normal. This is especially beneficial for staffing firms, as it gives them consistent funding that will not fluctuate based on the economy.
Another great benefit of payroll invoice factoring is that it provides a large amount of cash quickly and easily.