What is Payroll Factoring
Article summary: The first thing you should know is that there really is no such thing as payroll factoring. However, the most common reason small business owners use factoring (which is a form of financing where one sells their receivables) is so they can make payroll. It’s important to learn about this business tool, as well as other small business funding options, to make the most informed decisions for your business if you need financing.
Reasons Why a Business Might Use Payroll Factoring (other than payroll)
1. Inventory needs. There are times when you may need to quickly purchase extra supplies, such as if a client places a huge order or a vendor offers you a deal you just can’t pass up.
2. To continue operating as normal. You have a schedule to keep. Bills still need to be paid. Marketing, advertising and sales campaigns can’t just stop. When you are short on cash, other areas of your business suffer.
3. You are unable to get a business bank loan or other types of small business financing. Trying to qualify for a bank loan is very challenging. They expect you to have tons of collateral and excellent credit.
What you need to Know about Payroll Factoring
- Factoring is when a business sells its accounts receivables (the money that others owe your business) to a financing company called a factor.
- You and your factor will go into a long term agreement where he will pay you an advance of 80-90 percent of the value of the invoice up front.
- The invoice must be credit worthy or else the factor will not approve payment.
- Instead of sending payments to you, your clients will send their money to a P.O. Box that is controlled by the factor.
- You don’t have to worry about funding anymore and if you are constantly stressing about cash you are not focusing on growth
- It’s ideal for businesses that do a lot of invoicing, particularly if you have good customers
- When you are in danger of missing payroll, this provides a quick way to get you out of your cash flow jam
- Your client will be notified about the factoring arrangement, which signifies that your business is having financial difficulties
- Not all of your clients will be approved by the factor, especially those with a poor credit history and a habit of not paying on time
- Some of your clients might have policies against factoring
- It is a long term commitment and hard to move on, which keeps you in debt and depletes your cash
- Payroll factoring can be very expensive
- In many cases, it will take 60 days or more to set up
- This decision can have an effect on future bank financing because it shows a lack of a successful cash flow management strategy and lenders never want to work with a business that is desperate or mismanaged.
Are There Any Alternatives to Payroll Factoring
A line of credit from Financing Solutions (www.financingsolutionsnow.com) is a much better alternative.
- Their line of credit costs nothing to set up
- Your fast business line can be set up in 48-72 hours
- A line of credit is perfect for making payroll when cash flow is down, which is the number one reason why businesses set up a LOC
- The approval standards from Financing Solutions are easier to meet than those from a bank, making it the perfect alternative to payroll factoring