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By law, all businesses must pay employees in a timely manner. After all, as a business owner, you are responsible for the livelihoods of other people. However, once in a while in tough financial situations, making payroll can be a challenge. If you have outstanding invoices with net terms between 15 to 90 days, there’s a chance that your customers will pay you only after a payroll cycle or two. This create a huge gap in your cash flow, putting your employees at risk for not getting paid. Luckily, there is a type of financing called payroll invoice factoring that solves this common issue.
Payroll invoice factoring is a solution that helps generate earlier cash flow for businesses with outstanding invoices with long net terms, usually between 30 to 120 days. It is not a loan, but rather a transfer of invoice from your business to a third-party company called a factoring company. Through payroll invoice financing, the company will be able to supply you with an advancement in exchange for your invoices. Thanks to this type of financing, business can continue working hard to run their businesses without worrying about losing their loyal employees.
Any business that employs employees will benefit from payroll invoice factoring. Regardless of whether they are full-time or part-time employees, employees rely on their paycheck to stay motivated to work. Many business owners would agree that the key ingredients to running a successful business is to take care of their employees.
Problems & Solutions Faced by Payroll Invoice Factoring
Making sure that you can make payroll each week has more underlying benefits. This includes:
Business interested in receiving payroll invoice financing must work with a factoring company to begin this process. Although there are many factoring companies out there that provide payroll invoice factoring, each one works more or less along the same line:
First, as soon as you have sent out your invoices with a due date between 30 to 120 days, you can begin searching for a factoring company that is best fit for your business and sell your invoices to them.
Once you have completed your research and picked a factoring company, the factoring company will check your business as well as the past and present invoices you are factoring. They may also ask for information as well as credit checks on your clients.
After passing this review, the factoring company will give you an agreement to review and sign. It is helpful for you to bring in a lawyer to review this document as this agreement will include details about all fees, the payment plan and conditions, and the initial maximum fund amount you can receive, which would be the maximum factored amount outstanding at any time.
After you sign the agreement, the factoring process will begin. First, the factor will give you an advancement either by bank wire or check that you can use called the advance rate, which is usually 80% - 90% of the invoice’s value. You can start using this advancement as soon as 3 business days.
Also, since factoring usually involves transferring the responsibility of bill collections away from the factoring company, the factoring company will also contact the clients with information on how to send payments. Your clients need to be informed of your factoring agreement in order to understand why they will be paying a different company.
After the client has paid for the invoice on time, the factoring company will send any remaining balances, known as the reverse amount, to you. As compensation for this invoice factoring services, the factoring company will also deduct a service fee, or rebate, from the remittance. Your agreement outlines this fee ahead of time.
As you are considering invoice factoring, you may also be interested in a similar financing plan called payroll invoice financing, or invoice receivables financing. Like invoice factoring, invoice financing also solves the issue of limited or low cash flow issues by providing advancements on invoices. Also, payroll invoice factoring also requires a third party company to coordinate the financing.
What separates invoice factoring from invoice financing are:
|Payroll Factoring||Payroll Financing|
|Actual Amount Advanced|
|Speed of Funds|