What is Payroll Factoring?
The only real way that payroll factoring differs from invoice factoring, aka receivables financing, is that it’s done specifically for the purpose of funding payroll expenses. Some clients use payroll factoring only on an occasional basis while others use it on an ongoing basis.
We offer payroll factoring for staffing agencies, recruitment and hiring firms, and temporary employment agencies, and any other type of business able to use invoice factoring as a business finance tool. Get a free, no-obligation quote for invoice factoring with competitive rates, fast funding, and a transparent agreement with no hidden fees.
How Payroll Factoring Works
Payroll factoring (or payroll invoice factoring) works the same way invoice factoring works. The process is very simple and enables you to unlock working capital that might be tied up in unpaid receivables for 30, 60, or even 90 days or more. Here’s how the process works:
- You determine your business needs additional capital to cover payroll expenses or to better align payroll expenses with corresponding revenue.
- You factor (or sell) one or more outstanding customer receivables to us and receive an advance of up to 90% of the invoice amount (or potentially even more) on the same day for a small fee (called a payroll factoring fee) and use the working capital you unlocked to meet payroll expenses.
- Once your customer has remitted payment for the invoice(s), you also receive any amount held in reserve against payment.
Here’s an example showing the timeline of the process:
|Day One||Generate a customer invoice and factor it with Goodman Capital|
|Day One||Receive a 90% advance (or even higher)|
|Day 30-60-90+||Your customer remits payment, we collect our fee, and you receive any amount held in reserve|
Is payroll factoring only for staffing agencies?
No – it can be used by any type of business that is able to use invoice factoring. Nearly any type of business that invoices their customers on terms or waits 30 or more days after receiving earnings statements can expedite cash flow if they factor invoices. However, this business finance tool is commonly used among staffing agencies and similar types of businesses.
It’s commonly used in the staffing industry because staffing agencies, recruiters, hiring firms, and temporary employers often outlay many thousands of dollars to recruit, hire, place, and onboard workers and then wait weeks – or even months – to receive the income earned for those pursuits.
Payroll factoring brings better alignment between payroll expenses and corresponding revenue, especially for businesses in the staffing industry, including:
- Staffing agencies
- Temporary employers
- Recruiting agencies and hiring firms
- Professional recruiters
- IT staffing agencies and consulting firms
- Security guard agencies
- Nurse staffing and other healthcare staffing agencies
- Hospitality staffing and temporary employment agencies
Other types of companies that might benefit similarly include medical billing companies, call centers, and businesses that hire large numbers of employees for seasonal work periods.
Why do companies leverage receivables to fund payroll?
Payroll is often among the biggest expenses for a business, especially businesses that provide services (vs. manufacturing companies and others requiring immense capital investment in equipment, for instance). If your business is often or even only occasionally finding itself short of the ability to meet payroll expenses, factoring invoices can help alleviate this issue.
It’s also common for companies in startup and high growth phases to find that payroll expenses are temporarily outstripping revenues. This is another instance where factoring is a good option to ensure adequate funding for payroll on an occasional or even an on-going basis, until incoming revenue is sufficient to cover operating expenses, including payroll.
Likewise, if your company needs to make a significant investment in equipment, construction, or some other big-ticket capital cost, you may choose to use payroll factoring as a short-term solution to ensure you have ample money available to meet payroll expenses while waiting to realize a return on your investment.
Does payroll factoring offer other benefits?
Factoring invoices to meet payroll expenses extends beyond funding the employee’s paycheck. It also enables you to pay associated payroll taxes including federal, state, and local taxes.
Just as with invoice factoring, payroll factoring also provides additional organizational benefits. Among these are ensuring your business has adequate liquidity to take on new business or serve bigger accounts, avoiding the need to take on corporate debt or personal debt to meet expenses, and giving you additional leverage to negotiate fast-pay vendor discounts or keep capital in reserve.
Additionally, it’s is an effective way to preclude the need to lay off employees during seasonal lulls or short-term downturns. Given the cost of recruiting, hiring, and training employees, factoring could be an invaluable solution to reduce associated expenses and increase employee retention. Likewise, factoring to ensure you have adequate payroll funding prevents any loss of trust that might occur among employees, vendors, or customers if your business lost employees because it couldn’t meet payroll expenses.
Even if you’re already factoring with another company, we would be happy to give you a free quote for payroll factoring or general invoice factoring services. Apply to factor invoices online for the fastest answers – you could go from approval to your first funding in hours!