Winning a large contract or taking on a big project or job is a boon for a business of any size. For startups, entrepreneurial endeavors and small companies this sudden increase in business is both positive as well as a challenge. The challenges can be more problematic when there isn’t a cushion of reserve company funds in the bank. This is when payroll factoring comes into play as a very positive and effective short-term funding option.
What is Payroll Factoring?
Typically on large projects, either for specific products or services, there is a 30 to 90-day gap between the issuing of the invoice and when the invoice is due. There is also the possibility the invoice may not be paid on time or there is only a partial payment provided.
The delay will leave a company with a deficit in their accounts to make weekly, bi-monthly or monthly payroll. Employees may see this as a financial instability with their employer when it is just a component of the timing of business transactions.
Payroll factoring simply eliminates this concern through selling the accounts receivables (AR) to a third party company, a factor, who in turn funds a percentage of the value of the AR. The rate will vary based on several factors but is typically 80-95% of the value of the AR sold.
This funding is available within a few days of the application, providing immediate cash flow a business can use to pay employees and retain top workers.
What Payroll Factoring Is Not
It is important to recognize payroll factoring is not a loan and, therefore, is not debt against the business. Companies providing factoring are highly effective in providing short-term solutions to cash flow problems for otherwise financially healthy businesses.
Different companies offering payroll factoring will have different fee structures, which is an important consideration. Top companies offering this funding have far less in charges than a business would pay in interest and fees on a typical loan through a financial institute.
Saving Cash Reserves
Even when a business has a significant cash reserve dipping into this account to process payroll has risks. Using cash reserves to make payroll can limit the ability to take on new projects, ultimately hurting both the business as well as employees.
Using payroll factoring is a perfect solution to a very common problem faced by businesses of all sizes. Through factoring, the business can select the amount of the AR to factor, giving flexibility, stability, and security for everyone.
At United Capital, we provide payroll factoring for businesses of all sizes. To learn more about this service visit us online.
