Affordable Payroll Financing Options When Cash Flow is Down
A decade ago, payroll financing and payroll funding weren’t even a known business term and now the name is synonymous with many business loan categories. Payroll financing and payroll funding is basically a business loan that really can be used for anything the business owner likes including, but not limited to, meeting payroll when a small business cash flow is down.
Over the years the term payroll financing came about because many small businesses’ biggest expense is payroll and business loans or lines of credit are often used to fund payroll.
Business loans from banks, business lines of credit, payroll funding companies, accounts receivable invoice Factoring, and other funding options are all forms of payroll financing. In each case, the financing is unrestricted meaning the money can be used for any business purpose.
With the current recession, small businesses are going to find it harder and harder to be approved for any type of business financing and when payroll needs to be met, speed is a critical factor. If you do not meet payroll not only do you run the risk of losing the respect of your team but you run the risk of being fined by the government.
Business credit is, and will continue to become, more challenging and critical to the success of your business. With the COVID-19 government Payroll Protection Program (PPP) winding down it might be a good time to know the various small business funding options available.
Payroll Financing Solutions: Where Speed is Critical to Meet Payroll
A Cash Advance Which Grew Into a Business Line of Credit
Payroll Financing Solutions (now called just Financing Solutions) began operations in 2012 with the mission to help small businesses meet payroll quickly when cash reserves were down. Financing Solutions began operations with the idea of providing a credit card like cash advance within 3 business days to small businesses and then expanded that idea to a business line of credit that is easy and quick to get in place.
The owners of Financing Solutions have a keen understanding of the small business world because both Keith Giovannoli and Stephen Halasnik had 25+ years of experience building several companies themselves. Keith/Stephen understood both the challenges of building a business combined with how hard it is to be approved for any type of business financing.
The idea behind Financing Solutions was that there were a lot of really good small businesses and nonprofits that needed a cash reserve line of credit but had problems getting approved from banks.
A Business Line of Credit in 72 Hours Or Less to Meet Payroll
Financing Solutions is now one of the leading providers of business lines of credit to small businesses and nonprofits who have over $400,000 per year in revenue. The line of credit costs nothing to set up, nothing until used, and is very inexpensive when needed. The credit line can be set up within 72 hours and stays in place at no cost. If the credit line is used it can be paid off at any time. The 2-minute business line of credit application is online and requires no paperwork to get an offer letter.
Financing Solutions is specifically designed with small businesses in mind because what small business owners want is access to cash reserves when working capital is down so that important business expenses like payroll, rent, and other bills can be paid. There are also other times when a business needs cash to get new clients.
Staffing companies, nonprofits, technology companies, government contractors, FedEx Ground Delivery companies, and other companies with a large payroll are often the biggest users of Financing Solutions business line of credit product.
What Creditworthiness is Financing Solutions Looking For
Financing Solutions requires that the person signing the contract has a 650 or better credit score.
Financing Solutions does not run a credit check for any offer letters but bases its approval decision based on your self reported credit score. Once you have received the offer letter and decide to move forward then a credit check will be taken. The credit check is also used for validation purposes to ensure we are dealing with the business owner.
How Does Payroll Funding Work
Contrary to the term payroll funding, payroll finance companies that say they provide payroll funding have little to do with actual payroll. Your company is basically taking out a business loan and you will be able to use the funds for whatever you like including for the benefits of payroll funding.
The reason payroll Financing or payroll funding came about is that often with small businesses payroll is their biggest expense and when a small business needs funding it often is because there is a cash shortfall during payroll processing time. Speed has always been a critical factor when it comes to making payroll on time.
The staffing industry is often the biggest users of a payroll financing company. Temporary staffing agencies must pay their employees because these employees will either quit or tell your clients that they haven’t been paid. Staffing businesses run the risk of not only losing a billable employee but also a company client.
In so many small businesses, missing or delaying payroll is a big deal and once a business owner has been through that experience, they often want to set up a business line of credit as a cash back up plan.
Are Invoice Factoring Companies Payroll Financing Companies?
Invoice Factoring companies are companies that will set up a long term contract with your business to purchase your credit quality client invoices. What this means is that once you invoice a client as long as that client is credit check approved by the Factor, the Factor will advance you up to 90% of the invoice. The remaining balance (10%) minus the Factors fees will come back to you when the invoice is paid by your client.
The money from Invoice Factoring doesn’t need to be used to meet payroll but can be used for any business purpose.
Invoice Factoring is a good financing option because you will always have a constant stream of business financing but it is very expensive. Factors do not like to factor only one or a few invoices and as a result, you will be required to go into a long term contract. You will find that once you get used to Factoring that it will be hard to mentally and contractually move away from Factoring your invoices.
Also, in every Factoring arrangement, you will be required to have your clients agree to the terms because the Factor will want all invoice payments to be sent directly to the Factor or a lockbox.
Lastly, if there are any unpaid invoices by your clients your business will be on the hook for paying back the Factoring company for the advancement they had already provided you.
How Fast Will IT Take to Get a Bank Loan or Line of Credit From a Bank
Banks are really not a good quick payroll funding solution because of three key reasons. Banks are super slow. Banks want collateral. Banks want personal guarantees and credit scores over 680.
Banks are super slow
A traditional bank often wants an extensive application filled out that will require both extensive personal and business information of all business partners. The bank application itself will take a business owner a solid week or two to complete.
Once the application is completely filled out you can expect an approved/not approved answer from as little as a month to as long as a few months. That does not include if the inventory or real estate pledged needs to be evaluated.
In addition, a bank loan or line of credit payment terms are complicated and often have covenants meaning the bank can pull your loan or line of credit if certain conditions are not meet.
Banks want collateral
All banks and credit unions want collateral to back up a business loan or business line of credit. Collateral can be liquid cash such as money in various bank accounts, unpaid invoices, business cash reserves, real estate, stocks, bonds, life insurance policies, inventory, and any other assets that can be sold easily.
Banks, in most cases, have the lowest interest rates for overall payroll funding costs because if you default, they can sell the collateral to recoup their losses. However, having to put up collateral is often the hardest part of the financing program for many small business owners.
Banks want personal guarantees and credit scores over 680
All business loans rather they be direct from a bank or the SBA (small business administration) require a personal guarantee which means that if you fail to pay the loan back, the bank will go after all of your personal assets including your home. That is why if you own your home with another person he/she will also be required to sign the loan documents.
Banks also want to see at least a 680 personal credit score but with many small business owners, they are putting their personal guarantee on company credit which often have a negative impact on your personal credit score regardless if you have never missed a payment.
Factoring, Banks or Alternative Loans Are the Funding Options You Will Have
Time is one of the most important commodities and when it comes to payroll financing, unfortunately, there isn’t a lot of time. Understanding what banks look for, alternative funders are like and what Factoring is, will go a long way in determining what direction you will need to go.
You are truly not a business owner until you run into your first situation of potentially missing payroll. After the first time, you will remember that situation forever and there are two basic solutions to ensure you always have enough money to make payroll.
Business Line of Credit
A business line of credit is intended to be a cash backup plan and with small businesses, 75% of the time a line of credit is used to make payroll. A business credit line can be from either a traditional bank or an alternative lender like Financing Solutions.
Depending on how much you might use the credit line you might find that Financing Solutions is a much better solution because Financing Solutions doesn’t charge anything to set up your line or to keep it in place whereas a traditional bank will charge you yearly regardless if the line is used or not.
There might even be years when you don’t need your credit line but having a line of credit ready to go is always a smart decision.
Small Business Cash Flow Management
Many times business owners only pay attention to their monthly income statements however reviewing your balance sheet, cash flow statement and AR report is always a good practice.
Cash flow is oftentimes overlooked by business owners because they are so driven by growing sales and taking care of their customers. As a business owner, these three reports will help you determine if you charging enough for your services/product and if your clients are paying you on time.
You will be amazed at how much a little improvement in margins and AR turn will help your cash position.