Stop for a moment and think about your typical financial issues with your business. If you are like most staffing companies, IT companies, and even manufacturing companies you probably have difficulty juggling the need to make payroll with gaps in the time between invoicing and getting paid by your customers. If this sounds familiar, then payroll factoring is an option to consider.
What is Payroll Factoring?
The basics of payroll factoring are very simple. A third party, the factor, will buy your accounts receivable based on the creditworthiness of your customers. They will verify the invoices and review your customer’s ability to pay, and then provide you with cash, within a few days of submitting an application, to a value of up to 80% of the invoice totals. They will hold the balance, typically about 20%, in reserve. The factoring company retains a small percentage of the total as their rate for the service.You have the cash on hand to make your payroll and ensure all your financial obligations can be met.
Your Customers
Once you have been approved for payroll factoring by the factoring company and selected the accounts receivable you wish to sell, the factor will notify those customers by letter they are handling the account. As this is very common in most industries, particularly in B2B sales and for staffing services, it is not an issue for your customers and the terms of the sale never change.
Your customers will then pay off the invoice or invoices to the factoring company and not to your business. Once the invoice is paid in full and closed, the factor will deduct the agreed upon fees and forward any residual balance. The fees will be determined by the factoring agreement in place, the billing cycle, or billing period, as well as other factors.
When it Makes Sense
For any company struggling to make payroll with open invoices and ongoing sales and growth opportunities, payroll factoring is a very important option to consider. Not only can companies use the funds immediately to retain top staff, but the funds can also be used to recruit new staff to take on new contracts, allowing your business to take advantage of market opportunities.
Additionally, with payroll factoring, your accounts receivables are managed by the factor, so you can focus your office staff on what you need them to do, not worrying about staying on top of invoices and handling collections.
