As a small business, your company depends on the performance of your employees for its success. Your employees depend getting their paychecks from you on time.
A huge mistake a business owner can make is missing payroll. When you miss your first payroll cycle it starts a chain of events that only get worse from there. It can result in the company to go out of business.
Challenges of Making Payroll
Making payroll is a challenge for startups and small businesses. There is a lot that goes into it and you need to do everything correctly.
You need to track time sheets and handle payments. Just handling taxes alone can be complicated, especially when you factor in state taxes. There are some programs available to help you with this task, but it is a lot of work.
Additionally, you need to make sure that your payroll bank account has enough money on the right date to cover all the expenses. This is where it gets more difficult for the business.
Corporate clients often pay their invoices in 30 to 60 days. Some companies even take longer such as 90 days. Few small business owners take this delay into account when they start hiring employees. However, this oversight can create a problem.
Employees need to be paid weekly or bi-weekly, but clients are paying in 30 to 60 days. You will encounter problems unless you have a cash reserve to make payroll. Make sure to be watching your cash flow or bank accounts closely, or else you will find yourself in trouble.
What is Payroll Funding?
One way to solve this problem is to use payroll funding. For most people, payroll funding usually refers to using invoice factoring to cover payroll. However, other financing products may be used as well.
Invoice factoring is a type of financing that enables you to fund slow-paying invoices due from creditworthy commercial clients. Instead of waiting up to 60 days for payment, you get the funds directly from the factoring company. These funds provide your small business with the working capital to cover payroll and other expenses.
How Does Invoice Factoring Work?
It takes about a week or two to set up an account with a factoring company. Once the account is set up, your company is ready to finance invoices.
To get funding, submit approved invoices to the factoring company. The factor will provide an advance of 80% to 90% of the invoice. You get these funds within a business day. The remaining percent is retained to cover any underpayments on the invoices.
Improve Cash Flow
Most companies that use factoring finance their invoice on a regular basis. Most choose to factor at least enough so that payroll and other important expenses are paid for.
Also start building a cash reserve for your business. A cash reserve comes in handy to help you with any cash flow issues and reduces your reliance on financing.
Pros for Small Businesses
The most important advantage is that factoring can be used to solve payroll problems caused by slow-paying clients. Factoring is available to most small businesses. To be eligible, you need to have good, creditworthy commercial clients and unencumbered invoices.
It is also helpful for growing your business sustainably. The line increases as your sales to approved customers grows. This flexibility ensures that your cash flow is covered and makes payroll funding a great option for small and growing companies.
Is It Right for You?
Payroll funding is very common in payroll-heavy industries like staffing and security agencies. However, it can be used by any company that has employees and qualifies for the service.