What are Payroll funding companies?
Payroll funding companies are companies that are providing business loans, business financing, or business funding typically so that the business owner can pay his/her employees on time. However there are different types of payroll funding companies and many of them are not geared to small business financing but to larger businesses which have nothing to do with you using the loan for payroll.
ACCOUNT REIEVABLE FACTORS
An Account Receivable Factor or Factoring are very traditional ways to get financing but it doesn’t have to be just for making payroll. Factoring goes as far back as biblical times and basically is the exchange of your receivables ( the money your clients owe you) for cash. A traditional Factor will want a long term relationship with your company and will require that all your client payments go directly to the Factor. The Factor will advance you up to 80% of the invoice once you send it out to your client. There are non-recourse and recourse Factoring. Non-recourse Factoring means that if your client defaults on paying for your services then you are responsible for paying back the Factor. Non-recourse Factoring means that the Factor company will take the risk if the client doesn’t pay. Of course non-recourse Factoring is more expensive because the clients will be taking the risk if the client doesn’t pay. Receivable Factoring can be a good funding alterative but only if you have the time to set it up (2-3 weeks) and if you plan on having Factoring for 2-3 years. It can also be really expensive not just based on the interest charged but also the yearly fees. Most people also don’t realize that their business usually only needs financing for a short period of time and that their business can run fine on current cash blow for its working capital.
TRUE PAYROLL FUNDING COMPANIES ARE FOR BUSINESS PAYROLL
There really are only 2-3 companies in the United States that are geared to helping a small business under $7 million in sales make payroll in an emergency situation. The good thing about these companies is that they do not shy away from a company that says I have payroll due in 2 days and my best client didn’t send the check yet. A traditional factor might run for the hills when they hear this and might think less of your business. However, payroll funding companies completely understand that things happen in a small business that don’t indicates automatically that you run a failing company. In fact, most payroll funding companies really are providing loans or financing to good companies that rarely needed funding because they usually have working capital based on their current cash flow.
ARE BANKS GOOD AT PAYROLL FUNDING?
If you can get a business line of credit then that is the way to go. It is the cheapest and it gives you flexibility. However, the interest a bank charges isn’t the other cost to consider. The bank is going to charge you a yearly fee and the bank is also going to require either audited/reviewed financial form your accountant which can run $10,000 or higher per year. Plus each year the bank will require you to bring the line down to 0 for 30 days. Will a bank care if you use their money to pay your people? No, they will just want you to make sure you are able to pay the loan off at come point.
USE A REAL PAYROLL FUNDING OR PAYROLL FINANCING COMPANY
If you are looking for quick business funding so you can make payroll in a tight time frame, it might be good to talk to a company that specifically provides loans for payroll. They will talk your language and will not be put off by the idea that you are needing the money fast.