All employers have a legal obligation to pay employees on time. So, when the money runs short and payroll is coming up, what are the financing options for business owners? Payroll factoring is one solution business owners turn to for extra cash when the payroll period is looming. Financial institutions that offer payroll factoring lend the business money based on its outstanding invoices. But choosing payroll factoring or a business line of credit to make ends meet is a decision not to be made lightly. Read on to learn more.
How Does Payroll Factoring Work?
Also called “Accounts Receivable Factoring” or “Invoice Factoring,” payroll factoring companies advance money based on the company’s outstanding invoices in exchange for a fee. Typically, the lender (called a “factor”) will choose which unpaid invoices they will fund based on the creditability of the customer or vendor. The factor then advances your company from 80% to 90% of the invoice. The financed portion is called the “borrowing base.”
Next, the factor contacts your customers with a “notice of assignment,” which informs customers that payments are to be collected by the factor. Customers send their payments to the factor, and then the remaining 10-20% balance—called the “reserve”— is sent back to the borrower, minus the factoring fee.
Pros and Cons of Payroll Factoring
Companies with long-term invoices may find payroll factoring a helpful solution. On the other hand, some business factoring agreements are challenging to cancel, so even if you don’t need the financing, you could be saddled with the contract.
Factoring companies also expect extensive information before funding a borrower, so there may be better solutions than payroll factoring if you need the money in a hurry. Some factor applications require the company to be incorporated or the invoices to be from commercial enterprises or government entities. Factors also look at the “quality” of your invoices, so the customers must have a good credit history.
If reputation matters to your company (and it should), it’s critical to understand that your customers will know you are using a factoring company to collect money. And knowing that about your company could be a hint to customers that your business is struggling.
What Is a Business Line of Credit?
One alternative to using payroll financing is to have a business line of credit at your disposal. With a business line of credit, borrowers apply for a preset sum to draw from when needed. A business line of credit is a type of short-term loan set aside in a separate account for the borrower’s use. Once the money from the fund is used, the borrower makes payments on the amount drawn until it is paid in full.
How Does a Business Line of Credit Work?
Depending on the business line of credit terms, the borrower repays the loan in agreed-upon installments and pays interest on the borrowed amount. The business line of credit is revolving credit, so as the money is repaid, the money is available to borrow again. Unlike a traditional bank loan, where the borrower makes predetermined installment payments over the life of the loan, business lines of credit only require payments on the borrowed and not the entire sum. Be aware that some lenders charge additional fees with business lines of credit, even if no money has been withdrawn.
The money is available to the borrower for as long as the loan terms dictate. However, if the company defaults on payments, the lender may terminate the agreement and demand that the loan be paid in full.
How To Get a Business Line of Credit
Most traditional banks, credit unions, and alternative lenders offer business lines of credit; however, each financing institution has its own requirements and qualifications in the application process. Business lines of credit can be secured or unsecured. A secured business line of credit is tied to collateral or assets, such as business equipment or the company’s property or building. Having collateral backing the loan lowers the risk for the lender, so you may be able to find lower interest rates with a secured line of credit. Of course, the company risks its assets being seized if payments are not on time.
An unsecured business line of credit typically has higher interest rates because it requires no collateral or personal guarantee. Borrowers are not at risk of losing valuable real estate or equipment, and the loan approval process is quicker because the collateral doesn’t need an appraisal.
A Good Alternative to Payroll Factoring
To improve cash flow and serve as a backup fund in an emergency, business lines of credit might be a better solution for your company—even for meeting payroll. Short-term loans like the business line of credit contribute positively to your credit history and credit score—as long as you make payments on time. Plus, customers will never know your company is having cash flow issues.
Financing Solutions offers an unsecured business line of credit. There is no charge to set up the line and nothing to repay until you use it, so it is a perfect small business backup plan.
Your business must be at least two years old and have less than $5 million in assets to be eligible for a line of credit from Financing Solutions. The process is quick and easy, and the line will remain in place for up to 12 months. In most cases, you can get the money you need in less than 48 hours.
Financing Solutions is an alternative lender offering an easy application process (it takes less than two minutes to fill out) and requires no collateral or documentation for a written offer letter. Other alternative lenders have a much longer application process and can be expensive.
The founders of Financing Solutions have started and grown several companies together, so we understand how important it is to keep costs low. That’s why we don’t charge you to set up the credit line, and there are no maintenance fees. We don’t ask for personal guarantees, and applicants can receive a no-obligation offer letter the same day. We make approval decisions based on our decade of experience working with small businesses. Find out today why we have five-star ratings from the Better Business Bureau and Google. Also:
- There are no costs to set it up or keep it in place
- The easy 2-minute application online application
- If approved, you’ll receive a same-day, no-obligation offer letter
- The fastest setup, 48-72 hours
- Once you have the line of credit, requests for funds are wired to your bank in minutes
- You can use your line of credit whenever needed
- Inexpensive when used (low fees)
- There are no restrictions in place or collateral required
- No personal guarantee is required, either
- Financing Solutions is a leading provider of lines of credit
- We are a reputable company with an A+ & 5-star rating
- You can pay off the line whenever you are ready
- The credit line is easy to renew and renews yearly
- You have a secured account portal access 24 x 7
A business line of credit is an excellent funding resource available whenever your company needs it, without the heavy burden of term loan requirements. If you want to see if your small business would be approved and for how much, please fill out the no-obligation, 2-minute line of credit application here.