Payroll Factoring | Fund Your Business by Selling Your Future Receivables at a Discount

If you're in business, you've heard of payroll factoring. If not, don't worry, for you have made the right click. But what is it, exactly? Payroll factoring is a way to get funding by selling your future receivables at a discount.

It can be a great option if you need money quickly and don't have the best credit score to get a loan and ensure that your business runs smoothly without strain. Keep reading to learn more about how payroll factoring works and whether it might be right for your business.

What is Payroll Factoring for staffing companies?

Payroll factoring is a type of financing that allows businesses to sell their receivables, or invoices, to a third party known as a factoring company.

Factoring companies offer businesses quick and easy access to cash, which one can use to cover various expenses, such as Payroll, inventory, or other business costs.

Payroll Factoring Versus Invoice Factoring

With payroll factoring, the staffing company sells its accounts receivables to a third party, known as a factor. The factor then collects the payments from the company's customers.

Invoice factoring, on the other hand, works differently. In this case, the company sells its invoices to a factor. The factor then collects the payments from the company's customers. The invoices, therefore, back the funds.

Payroll and a calculator

What is a Payroll Factoring Company?

A Payroll factoring company is a financial institution that specializes in providing working capital to businesses by purchasing their receivables or invoices.

Payroll factoring companies typically advance businesses a percentage of the total value of their invoices, minus a small fee. Once the company pays the invoices, the remainder of the funds is released.

How Does the Payroll Factoring Work?

First, the business owner contacts a Payroll factoring company and applies for financing. Then they check your limit to establish if you are a creditworthy customer.

Secondly, they verify the invoices; if approved, the payroll factoring company will advance the business owner a percentage of the value of their invoices. The business owner then uses the funds to cover their expenses and pay their employees.

Finally, when the customers pay their invoices, the payroll factoring company will remit the remaining balance to the business owner minus their fees. The entire process usually takes about 48 hours from start to finish.

Why Use Payroll Factoring?

There are several reasons why businesses use payroll factoring in staffing companies.

Convenience

Perhaps the most common reason is that it offers a quick and easy way to access cash. It can be vital for businesses that need money to cover expenses, such as Payroll, inventory, or other business costs.

Financial Growth

Another reason businesses use payroll factoring is that it can help improve their cash flow. Factoring companies typically advance enterprises to a percentage of the total value of their invoices, which can provide them with much-needed liquidity. In addition, factoring companies often purchase invoices at a discount, which can help businesses save money.

Temporal Employees' Prompt Payment

Temporary employees often fill in for absent workers, cover a sudden increase in workload, or provide specialized skills not available in the workforce. The company is able to pay temporary employees without strain.

Although payroll factoring is a valuable financing option for businesses of all sizes, it can be particularly beneficial for small businesses that do not have the same access to capital as larger businesses.

Reliable Cash Flow

In addition, payroll factoring can provide businesses with much-needed cash flow flexibility. Factoring companies typically advance enterprises to a percentage of the total value of their invoices, which allows them to receive funds sooner.

Types of Payroll Factoring for Staff Agency

Majorly, there are two types of payroll factoring which includes

  • Full-service functioning
  • Money-only factoring

Full-service factoring companies will typically provide several services to businesses in addition to funding. These services can include invoicing, collections, and credit checks on customers.

Money-only factoring companies will only provide funding to businesses. They will not offer any additional services.

The main difference is that full-service factoring companies offer additional services, while money-only factoring companies do not.

Other types include:

  • Advance against the commission. It involves the staffing agency selling its receivables, or invoices, to the factoring company at a discount. In return, the factoring company advances the staffing agency a percentage of the total value of the invoice.
  • Another factoring payroll type is known as recourse factoring. The staffing agency sells its accounts receivable invoices to the factoring company but retains responsibility for any unpaid invoices. In return, the factoring company advances the staffing agency a percentage of the total value of the invoice.
  • The third type of payroll factoring is known as non-recourse factoring. The staffing agency sells its receivables to the factoring company but is not responsible for unpaid invoices. In return, the factoring company advances the staffing agency a percentage of the total value of the invoice.
Smiling woman and man shaking hands

Disadvantages of Payroll Factoring for Staff Agency

One of the main disadvantages of payroll factoring for staff agencies is that it can be expensive. It is because businesses have to pay a fee to the factoring company.

Another disadvantage of payroll factoring is that it can be risky. Businesses can lose money if their customers do not pay their invoices on time.

In addition, businesses should be aware that the factoring company becomes the legal owner of the invoices. The company can sue its customers if they do not pay their invoices on time.

Payroll Factoring Versus Payroll Funding

There are several critical differences between payroll funding and payroll factoring.

Perhaps the most crucial distinction is that the funds are advanced to the business owner with payroll funding, while with payroll factoring, the funds are paid directly to the employees. It can make a big difference in spending the funds and how much control the business owner has over them.

Payroll graph

Another key difference is that the funds are typically paid back over time with payroll funding. With payroll factoring, allocation follows when the customer pays the invoices.

With payroll funding, there is more flexibility in terms of the funds' usage, while with payroll factoring, the funds must pay employees.

It's worth noting that payroll funding is, also called payroll financing, is typically more expensive than payroll factoring since the lender is taking on more risk by lending to a business owner rather than directly to the employees. However, the flexibility and convenience of payroll funding can be worth the extra cost for some businesses.

So, which option is right for you? That depends on your specific needs and situation. If you're looking for a way to get quick access to funds to pay your employees, then payroll factoring may be the better option.

But if you want more flexibility in using the funds and don't mind paying a bit more, payroll funding may be the better choice. Talk to a financial advisor to learn more about the options available to you and find the right solution for your business.

Payroll document with glasses and a calculator

What Are Some Alternatives to Payroll Funding and Payroll Factoring

There are several alternatives to payroll funding and payroll factoring. One option is to take out a loan from a bank or other financial institution. Another possibility is to use credit cards to finance your Payroll. However, this can be expensive and may not be an option for businesses with poor credit.

Another alternative is to use a service like WePay or PayPal to process payments from your customers. It can be a convenient option for businesses that don't want to handle the administrative work associated with processing payments themselves.

Some businesses may be able to get funding from friends or family members. It can be a risky option since there is no guarantee that you'll be able to repay the loan, but it can be a helpful way to get started if you're unable to qualify for other types of financing.

Differences Between Payroll Funding and Payroll Factor

  1. Factoring is a short-term solution, while payroll funding is for longer-term financing needs.
  2. Factoring is typically less expensive than payroll funding. Companies do not have to pay interest on their borrowed money through payroll funding.
  3. Businesses are responsible for unpaid invoices when they use payroll factoring, whereas businesses are not responsible for unpaid invoices when they use payroll funding.
  4. The factoring company becomes the legal owner of the invoices when businesses use payroll factoring, whereas the funding company does not become the legal owner of the invoices when businesses use payroll funding.

How Do Payroll Factoring Companies Ensure That You Can Monitor Your Credit Easily?

Monitoring your credit is essential, especially if you're working with a Payroll factoring company. They will typically give you access to their credit monitoring system. This system will allow you to track your credit score and see how your business is doing in terms of its credit health.

It can be a great way to stay on top of your finances and ensure that everything runs smoothly.

If you're ever worried about your credit score to health, reach out to your payroll factoring company. They will be able to help you understand what's going on and offer advice on how to improve your situation. In most cases, they will also be able to work with you to get your credit score back on track.

Lastly, if there are still some uncertainties left, we recommend seeking advice from some of the best formation services and registered agent services out there. Here are some of the most reliable:

Trusted Business Formation Services

Swyft Filings

Despite only doing business since 2015, their 100% positive reviews are speaking for themselves. Swyft Filings offers one of the best refund policies in the industry. On a bonus side the company also has no processing or cancellation fee for your refund. It is a great company to consider when looking to designate a registered agent service for your business.

BizFilings

BizFilings takes you through the whole process from quality check to post-incorporation and also offers on-going support. You can choose various payment plans based on the features you want and your budget. The features in the higher-end packages are also available in the lower-end packages but at an additional fee. With an A+ rating with the BBB, BizFilings is a trusted online formation service. 

SunDoc Filings

When compared to other formation services, SunDoc Filings provides volume discounts for multiple states and entities and equally amazing customer support. However, if you want a service that will save you money, you may find other services in the market that cost less. Also, you may not choose SunDoc Filings if you are looking for a service with payment packages with tons of features and free registered agent service.

Inc Authority

This is one of the most reputable companies you can pick as your registered agent service. Inc Authority has enough experience in the field, having been founded in the 1980s. Its free payment package stands out in what they offer. Loads of positive customer reviews speek for themselves how satisfied and happy with their services and their LLC formation speed their clients are. 

My Corporation

MyCorporation is known for offering a fast LLC formation process. If you wish to speed up the process turnaround time, you can use their expedited service, reducing the process from weeks to a few days, thoug for a fee. Nonetheless, MyCorporation is an excellent pick as your registered agent. It offers numerous payment packages with various features depending on your budget.

Conclusion

No matter what, it's essential to do your research before making any decisions. Payroll factoring can be a great way to get funding for your business, but it's not suitable for everyone. Be sure to consider all of your options before moving forward carefully. If you're unsure whether payroll factoring is right for your business, it's best to consult with a financial advisor. They can help you explore your options and find the best solution for your needs.

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