small business

Payroll funding

Manage cash flow and meet your payroll commitments with a payroll finance solution.

For many growing businesses, there can be cash flow gaps when you need to pay your staff but your client still hasn't paid you. This gap can have a significant effect on the day-to-day cash flow of your business, which can, in turn, restrict potential growth.

This is where payroll finance can help. It provides the funding you need to meet your payroll commitments, allowing you to continue to expand your company and always pay your employees on time.

How does payroll finance work?

Payroll finance providers offer funding solutions that can be integrated into your business’s payroll process. This allows you to instantly access the short-term funding your business requires to meet its payroll needs, by allowing you to raise funds against your unpaid invoices.

Using those unpaid invoices as security, you can access a line of credit to provide the working capital your business needs. This means you can draw down on the available funds whenever required, for example, if you need to meet an emergency expense, without needing to provide property as security like you would need to do with an ordinary bank loan.

You can then make sure your staff are paid on time, every time, and then repay the money you borrow with interest charged only on the funds you use.

How does payroll finance compare to invoice factoring?

Payroll finance should not be confused with invoice factoring, which is a slightly different type of financing. With invoice factoring, you can turn your outstanding invoices into funding for your business by selling them to a third party, effectively outsourcing your invoices to an external company.

How it works is simple: you sell your invoices to a factoring company at a discount, in return for the factoring company providing you with an advance of a large proportion of the total value of those invoices, minus fees. The factoring company then assumes the responsibility for chasing payment of those invoices.

This is a short-term working capital solution to help you overcome cash flow problems while you wait for invoices to be paid.

Payroll funding, on the other hand, is specifically used to pay your employees and not for general business needs.

What features come with payroll finance?

Make sure you consider the following features when comparing your payroll financing options:

  • No lock-in contracts. Unlike invoice factoring, payroll finance is typically offered with no lock-in contracts, resulting in increased flexibility for businesses. Check the fine print to make sure you understand all the terms and conditions of a finance contract.
  • Turnaround time. Fast access to funds is a hallmark of payroll finance, with same-day access to funds commonly offered. Compare processing times between lenders to find out how long you’ll have to wait before the capital you need can be made available.
  • Fees. Check to see what fees apply to each payroll finance option. Providers typically charge a percentage fee based on your company’s gross payable wages, so compare this fee across providers. Also remember to check whether there are any other hidden charges you need to watch out for, such as application or due diligence fees.
  • Interest rate. Check the interest rate that will apply to the money you draw down from your line of credit. This will have a huge impact on the total cost of financing for your business.
  • Cloud-based services. With the rise of cloud-based accounting services, payroll finance services are able to integrate with your business’s accounts receivable department in real-time. It’s a good idea to check out the cloud-based platforms offered by different payroll finance providers to find out how easy they are to use and what services they provide, such as timesheet management, comprehensive reporting tools and more.

Is there anything to avoid?

If you’re considering a payroll funding solution for your business, it’s essential to make sure you’re aware of any fees and charges that may apply. Read the fine print closely to familiarise yourself with the lender’s fee structure and check that there are no hidden charges.

It’s also important to ensure whether or not payroll finance is the right solution for your business’s cash flow needs. There are several funding options available, so check with your accountant to find out which one is the best fit for your business.

Questions you may still have about payroll funding

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