Your employees are the backbone of your company. As such, making regular and complete payments becomes pivotal in smooth out company operations. However, because of unforeseen circumstances, this is not always the case.
Making payroll is challenging for startups or growing businesses. If you find your newly-established business failing to make payroll, worry not. Most new businesses struggle; think of it as a way of acclimatizing to the business climate.
Fortunately, financial institutions are there to help you out of such a predicament. Thanks to payroll funding, you can receive the funding you need to make your payroll.
Payroll funding averts the possibility of non-payment claims or, worse, a complete company shutdown.
In this piece, we’ll look at what exactly payroll funding is, and how you can utilize it for your company’s funding.
What Is Payroll Funding?
As the name suggests, payroll funding has to do with financing your company’s payroll. It is a means through which companies receive funding to make their payrolls. A company receives this funding against its assets or accounts receivable.
This funding means that business owners can pay their employees even despite the company’s prevailing financial woes. The business owner must, however, provide some security for the financing in the form of assets or pending invoices.
Why Do Companies Fail to Make Payroll
Any business venture is unpredictable. So this month’s or year’s turnover may not be the same as the next one. Furthermore, most business owners are guilty of being overly optimistic.
Not making payroll could be a consequence of this optimism. Sometimes, however, the reason is more far fetched than being too optimistic:-
Here are a couple of reasons why some companies fail to make payroll:-
1. When a New Business Fails to Maintain Cash Flow
It isn’t uncommon for new businesses to need some financing to get off the ground. Even if the pace picks up, the business may not be able to keep this tempo up for long. Huge cash flow gaps may necessitate the need for this type of funding to pay employees.
2. When Commercial Sales Extend up to Net-30 or Net-60 Days
Such relaxed payment terms mean consumers can delay their payment. There’s nothing the company can do in such situations. When customers drag their feet in making payments, then payroll funding is your best bet.
3. When Your Company Grows Faster Than Unanticipated
Though company growth is not something many business owners complain about, if you can’t keep up with the company’s growth, you’ll have to deal with another batch of problems. One of these problems is making payroll.
Fortunately, you’ll probably have more than enough receivables to merit adequate payroll funding for your company.
How Does Payroll Funding Work?
Payroll funding isn’t limited to a company of particular type or size. Companies, big or small, or in whatever sector can qualify. This versatility is because payroll funding premises on invoice factoring.
Your company will sell a portion of its accounts receivable to the lender. The financing company buys the accounts receivables in separate installments. These installments usually come in two separate payments that cover the entire transaction.
The first payment installment is known as the advance.
This payment will amount to about 80% to 95% of the amount of the invoices. However, this percentage is not always the same across all lenders.
Remember, different lenders have different terms.
So while others may be a bit more generous when financing for your payroll, others may not be so lenient. Once you contract with the lender, you’ll know the precise amount and have the money in your bank account within three business days.
The financing company makes the second payment when the customer pays the pending invoice in full. Once the customer pays the invoice, the lender will transfer the payment to your company.
However, the financing company also makes the necessary deductions to the payment, including the financing fees. You’ll receive this payment within one or two business days.
That pretty sums up all that’s involved in payroll funding. So why should companies consider payment funding?
The Advantages
Payroll funding is overwhelmingly beneficial for all types of companies. Unfortunately, not many companies are aware of this type of financing. If you’re wondering whether you should embrace it, here are a few reasons why you should:-
1. Quick Financing to Make Payrolls on Time
Your employees not only need their payment in full but also on time. Being a business owner, you of all people should be well versed with the time value of money. Also, most employees won’t take delayed payments too well.
Payroll funding typically takes two to three business days to make it to your bank account. It is also way easier than bank loans. There’s less paperwork and hassle overall than getting a bank loan to pay your employees.
2. Bridges Cash Flow Gaps
Cash flow gaps are a headache for any business owner. You may have amassed tons of outstanding invoices, but your company reserves are dry.
Since payroll funding uses invoice factoring, you can bridge this cash-flow gap. This bridging ensures company operations continue with a motivated workforce.
Cash flow issues are a huge headache for most business owners. Payroll funding helps take the load off. You can then focus on more crucial aspects of running your company.
3. Ensures Continuity of Funds
We’ve mentioned above that your company receives funding against outstanding invoices. The lender makes the first payment, which is a portion of your outstanding invoices. The second payment comes after the customer pays the invoices.
After the financing company deducts his percentage, the company remits the paid invoices back to the company.
Payroll Funding Is for All Companies
Remember, this funding is not limited to a particular type of company. So long as you have accounts receivable or valued assets, you can receive payment funding.
All you need to do is find the right financing company, and you’re good to go. Pay your employees fully and regularly for a happy and motivated workforce.
For more informative reads, be sure to check out our other articles.
