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What Payroll Funding Options Are Available For Business Owners: A White Paper

White Paper: What Funding Options are Available for Business Owners

 

One of the most important actions a business owner can do is make sure they have funding in place to help their company in good times and bad. However, depending on where you are in your business, it is important for you to know your funding options. Below are the various funding options available.

 

Payroll Financing or Payroll Funding

Payroll Financing is an alternative lending option used for short term emergency funds or for bridge funds to help companies free up capital. The fund is intended so the business owner can pay its employee’s until the business can get back on track during an unforeseen expense or large increase in sales. The fund can be spread out for as long as 6 months and can be paid back in as little as 2 weeks.  In a short term fund situation such as a 2 month fund, Payroll Financing is the cheapest form of professional fund. Payroll financing companies will look at your companies past success and current viability to determine if a fund can be issued. The Payroll Financing Company can often make a decision in 24 hours or less and can be very flexible in terms of when you can pay off the fund with no penalty. Often, business owners who use Payroll Financing are just trying to solve a temporary funding problem.

 

Pluses

Emergency fund used to pay your employees during unforeseen company event

Keeps your business going without disruptions until other financing can be arranged

Cheapest cost for short term professional funds

Doesn’t tie up credit for other funds like equipment leasing

Super fast approval decisions in 24 hours or less

Unlike banks, more open minded in fund approval criteria

Willing to issue funds up to $100,000

Not tied into long term funding commitment like with a Factor

Negatives

Expensive if fund kept long term

Your business has to prove the fund can be paid back

Should not be used to fund an unprofitable business

Need to be in business 5+ years

 

Commercial Line of Credit thru a Bank

In most cases, unless you need the fund for only 90 days or less or only once every 2+ years, a commercial line of credit thru a bank will be the cheapest way to borrow money. The line of credit will take you 4-8 weeks to establish and the bank will look at your business financials, personal credit, and collateral.  Collateral might be your home, cash on hand or other liquid assets and this will be used to back up the fund in case of default. The bank will file a UCC (Uniform Commercial Code) which will show up on your credit report identifying assets in case of a default.  The UCC also allows other financial institutions such as equipment leasing companies to know your assets are assigned and limits what others will lend you. Most banks will want Reviewed/Audited financials from your accountant yearly which will cost you extra to get done and your bank will charge you a yearly fee to keep the line open. The bank will ask you for how much money you want the line to be for and that amount will need to be justified based on the business history and your collateral. Covenants are what banks put in place to measure should you keep the fund or if you want the line of credit increased and will be reviewed quarterly or yearly.  Banks are of course the most risk adverse so they will want to make every effort in their due diligence to ensure you can pay the fund back.

 

Pluses

Cheapest form of funding in the long run

Protects you against emergency money needs

Helps you fund accounts receivable until clients pay you

Can be used in any way you deem necessary

Negatives

Substantial increased expenses for review or audited financials

Yearly fee for keeping the line of credit open

Ties up available line of credit for other funds such as equipment leases

Takes 4-6 weeks to obtain and extensive owner involvement in process

Spouse may not be happy with personal assets being assigned

Hard fund to get until you are already successful

Yearly review and approval process for renewal

Restricts business decisions based on covenants

Will need to be in business for 3-5 years before a bank will approve line

 

Receivable Factoring

Factoring is actually a very old form of financing that has the benefit of being tied to your sales. If your sales are there, the financing is there. Factors are designed to limit their risk by funding up to 90% of your invoices for 90 days. A Factor will start off by contacting your clients to make sure that the invoices are real and that your client is credit worthy. In the due diligence phase, the Factor will ask you details about your business, Factors tend to specialize in certain industries. Factors have the right to reject a client you are working with or that you want to work with and if your client hasn’t paid you in 90 days, you will have to give the Factor back their advanced money. A Factor will charge a yearly fee which can be substantial. In 3 cases, we saw a yearly fee of $15,000-$20,000 for a $2 million business plus a high interest rate for each invoice they fund. Factors are not cheap and can cost 3-5 times what a bank charges. Factors are really looking for a long term relationship and once a business gets involved with a Factor, it is hard to move away from the Factor. If a business feels they will need the money for 2-3 years and you are unable to get a bank line of credit, then one option is to use the Factor for 2-3 years and then line up a bank to get rid of the Factor.

 

Pluses

Unlimited funding. You get the business, they will fund your receivables

More likely to work with younger businesses

Negatives

Very expensive funding solution

Factors want a long term relationship with you

Factors will call your clients which may worry some clients about your business

Yearly fee even if you don’t use Factoring that much

Factor might refuse to fund certain of your clients

Factors advance only 80-90% of your receivables. Problem for tight margin businesses.

If you clients pay >90
days you could have a funding problem

Will file UCC against your company affecting other financing

Hard to move away from Factors down the road

Can take 4-6 weeks to start funding

Your clients checks are going to Factor and then to you (fraud potential)

 

Merchant Funding Solutions or Merchant Cash Advance

Merchant Funding companies advance money to companies based on a percentage of the monthly amount of your past business credit card transactions. You need to already accept credit cards in your business. Merchant funding companies are a form of factoring and are often independent organizations that will look at your business credit card transactions to advance you money based the history of monthly receivables and how many transaction are done daily.

 

Pluses

Instant cash

Automatically sends you money

You are not personally liable to repay if you business goes south

Easy to obtain

Minuses

Very expensive

You need to already accept credit cards

Need to have a history of credit card transactions

Will want to see lots of small transactions and not larger transactions

Really only used for retail industry

Amount they are willing to fund might be to small to help your business

 

Home equity fund

Some business will get a home equity fund and will use that fund for the business when they need it. A home equity fund is based on how much equity you have in your home and one would get this fund mostly through a bank. There might be an appraisal needed which would cost $1,000-$2,000 plus a fund application fee.  This fund might take 2-6 weeks to obtain depending on the amount you are asking for.

 

Pluses

Inexpensive form of a fund

Easier to figure out how much is available

Can keep open yearly for a small amount of money

Negatives

Can have detrimental effect on your relationship with your spouse

Spouse might be required to cosign fund

Might take too long for you to get fund for your needs

If you don’t pay it back, your home is at risk

 

Refinancing of your home

Your home might have a considerable amount of equity or you might be farther along in its payment schedule. You might be able to refinance your home and use that capital for you business Refinancing of a home might take 4-6 weeks and you might be able to get more money out in this type of fund verses a home equity line of credit.

 

Pluses

Inexpensive form of fund verses say a Factor

Negatives

Can have detrimental effect on your relationship with your spouse

Spouse might be required to cosign fund

Might take too long for you to get fund for your needs

If you don’t pay it back, your home is at risk

The amount might be limited

 

Friends and Family

If you do have family and friends with significant money and you really need the money for an emergency fund, this might be good alternative.

 

Pluses

You get the fund to tie you over in emergency situations

Could be paid back with little to no interest

Negatives

Could cause a problem in your relationship

Your friends/family might not have the money

You may not want to reveal you have a problem/need help

 

Angel funding

Angel funding is when you agree to give up a percentage of your company in exchange for someone investing in your company. Contrary to most people’s perceptions, Angel Investors are looking for the company to have an exit strategy where you sell to either another company, or venture capital firm eventually. Most angel funding investments are in the $100k to $1 million range and the investors are looking to get a 10 times return on their money when you sell. Angel funding deals can take 6 months to 12 months to finalize resulting in a huge time commitment from the owner. It is estimated that only about 10% of companies seeking angel money get funded.

 

Pluses

Good investment capital to grow the business

Good strategic investors can help you grow your business better

Might give your business a competitive advantage

Your strategic direction might require this larger amount of capital

Negatives

Takes a long time to raise the money

Management will not be able to focus on building business during this phase

Lots of legal bills to finalizing agreement

A lot of pressure on owner to deliver

A lot of energy will be spent by owner/management team

Owner will need to make decisions in concert with investors from now on

Selling company in the future will be a committee decision but investors will want you to sell

Giving up equity in your company

 

Venture Capital

Venture capital is the most misunderstood way for companies to raise capital. VC’s are looking for established businesses that have already achieved sales in the $10-$30 million range  and have enough growth potential to go public or to be sold to a bigger company. Like an Angel investor, VC’s are looking to get their money out thru an exit strategy and not thru organic growth.

 

Pluses

This is the big time

Owner is going to get a big pay day

New professional experiences

Negatives

Most VC’s will want to replace the owner and bring in a professional team

Owners job will change

Entrepreneurialism is over as far as what you have done so far

 

This white paper is written by the Stephen Halasnik and Keith Giovannoli owners of Financing Solutions who have built 8 companies over the last 18 years. Financing Solutions provides quick funds to good companies when an unexpected expense or an increase in sales occurs. Please call us at any time at 862-207-4118×502 .

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