Of all the responsibilities a business owner has, covering payroll is one of the biggest. For successful service-based companies, payroll can also become a huge challenge – a growth bottleneck. Eventually, the service-based company experiencing a growth phase will reach a point where staff is 100 percent utilized. Which leads to the question: how are you going to handle the next new client if your staff is fully booked? Further still, if you are unable to take on new clients, where will you find the money to cover day-to-day expenses like payroll?
Turning new clients away is the last thing a growing business wants to do. The alternative is to hire new staff, but many growing businesses cannot afford to do so. Why? Unlike working with retail clients, who pay as soon as the work is done, business clients seldom pay as soon as the work is delivered. When customers wait 30, 60 or even 90 days to pay their invoice, it can seriously affect your business’ cash flow and, therefore, your ability to cover payroll.
Very few businesses can afford to take on new projects, pay their employees and cover the costs of growth, all before receiving payment from customers for work already completed. A business in this situation will need to find a cash flow solution quickly to avoid financial difficulties that can quickly hinder further growth and success. This is just one of the many reasons why companies choose payroll funding.
The Solution: Payroll Funding
What is payroll funding, and why are so many businesses using it to grow? Payroll funding is a type of invoice factoring that allows your business to convert its slow-paying receivables into immediate cash. You can then turn around and use this money to cover payroll and payroll taxes and to continue to see growth. Rather than waiting 30 days or more to receive payment from clients, your business can receive funds within just a day or two. In short, this flexible funding option ensures that your business can easily meet payroll requirements every week.
How Does Payroll Funding Work?
After you partner with a factoring company, you continue to serve your customers as usual. You then submit and sell the unpaid invoices you wish to receive an advance for to the factor. The payroll funding company will then advance up to 90% of the value of your invoice, which you can use to pay your employees and boost cash flow. In the meantime, the payroll funding company works diligently to collect payment for your invoice. The remaining 10% of the invoice, minus a small fee, is then delivered to you once the factoring company obtains payment from your client.
What are the Advantages of Payroll Funding?
Same-dat payroll funding
After your account has been established and the payroll funding company receives your invoice, it is a very smooth and easy process. Reputable invoice factoring companies typically provide same-day or next-day funding. In as little as 24 hours, you can have the funds you need wired to your business bank account.
Consistent cash flow
When you partner with a factoring company, their team will ensure your business always has access to consistent cash flow. The funds you receive from financing your business’ unpaid invoices will help you efficiently manage cash flow fluctuations. You will no longer have to worry about where to find the working capital to make payroll each payroll period.
Unlimited line of credit
Payroll funding is designed to grow with your business. As your accounts receivable grow, so does the financing amount available to your business. You can invoice your clients and then immediately turn around and fund the invoices, securing the capital you need to pay your team and service contracts.
Greater flexibility
With the stability this cash solution provides, your business can concentrate on accepting new orders/projects. Hiring new staff to fulfill new client orders and adding more clients to your business is less of a struggle when you can count on consistent cash flow.
More competitive terms
Allowing clients to pay in 30-60 days can put a serious strain on your business’ day-to-day operations, since you have employees you need to pay every week or 15 days. With the quick cash payroll funding provides, you can easily offer competitive payment terms to your clients, without fear of running into cash flow problems.
Debt-free financing
Unlike traditional forms of financing, payroll funding does not add debt to your balance sheet. While a bank loan creates debt and is listed as a liability, payroll funding is sale of your assets (receivables). Your business is simply receiving money it is waiting to be paid for a completed project or a fulfilled order; thus, debt-free financing.
If your business is struggling with the demands of rapid growth, you are not alone. Growing pains are a common issue among expanding companies – businesses of all sizes, types and in different industries. The key to sustaining growth is to anticipate bottlenecks before your business accelerates. Ultimately, utilizing payroll funding will not only give you the confidence that you can meet expenses each week, but also the flexibility to take on new clients and fund growth.
Would you like to learn more about how payroll funding works, and how it can provide the quick funds your business needs to grow? Contact our cash flow experts at Bold Business Capital to get started.
