Payroll Funding - What It Is, How It Works, and Its Advantages

eCapital Corp

Last Modified : Jun 18, 2024

Fact-checked by: Bruce Sayer

What is Payroll Funding?

Payroll funding, also known as payroll financing, enables a company to sell its invoices to get instant cash to fulfill its payroll needs. Payroll funding works by providing capital to pay employees or temporary staff before the client pays that company. It gives companies the ability to meet payroll requirements every week.

What are the Benefits of Payroll Funding?

Recruiting and retaining skillful and talented staff is one of the top challenges of every business. However, irregular payments to staff will drive them away from a firm. Timely payments to employees are the prerequisite to keep employees happy and satisfied. With payroll financing, for example, a startup staffing company can sell their invoices to a factoring company and receive weekly advances to pay temporary employees. The same is true for any small business and startup; invoice factoring provides the company with immediate funds to cover payroll, pay for business expenses, and grow.

Once you set up a financing account with a payroll funding company, you submit an invoice along with a copy of the time cards (detailing due dates for payments). Once the invoices are received, the payroll finance company advances up to 90% of the invoices and deposits the funds in your bank account. The funds can then be utilized to cover payroll.

How Does Payroll Funding Work?

1. The company fulfills and invoices for services.
2. The company sells its accounts receivables to a payroll funding company to keep the cash flow and meet payroll.
3. The payroll finance company advances up to 90% of the invoice or invoices, which can be used to cover payroll.
4. Once your customers pay in full, the payroll funding company settles the transaction by depositing the remaining balance of the invoice, less a small fee, into your company bank account.

How Fast is the Money Available for Payroll Funding?

The release of payroll funding would depend on the factoring company. Usually, factors provide exact same-day 100% payroll funding.

What are the Advantages of Payroll Funding?

• No cash flow issues
  The factoring company would ensure that there is always consistent cash inflow. You do not need to worry about how to meet weekly and fortnightly (biweekly) payroll.
• Same-day payroll funding
  Once an account is established, and the factoring company receives fax or an electronically generated copy of the invoice with any backup documentation by 10-11 am, funds will typically be wired to your account by 4 pm that day. That’s money sent to you within 24 hours.
• No hidden charges
  There are no hidden charges involved. Unlike traditional financing options, factoring companies are straightforward. Choose factors that have been in business for a long time and can provide you the best advice for finance-related solutions.
• Choice of payroll processor
  Many factoring companies may want the staffing company to place their payroll processing with them. However, there are factoring companies that allow the staffing companies to choose the best payroll processor for their industry, and expertly handles the funding of payroll.
• Enables you to grow your business
  With fewer worries at hand, a company can concentrate on taking up a new project/order. Payroll funding gives them the confidence to hire new staff to fulfill new client orders and not lose your talented human resource due to a lack of funds.
• Easy to obtain
  Payroll funding, through factoring invoices, is easy to get. A bank loan application is a lengthy and complicated process. Small business and startups benefit the most from this as they are unable to meet all requirement for a bank loan. With factoring services, you only need creditworthy clients.
• Does not add debt to your balance sheet
  Bank loans add debt to your balance sheet and appear as a liability. Selling accounts receivable is debt-free financing.
• Allows you to provide competitive terms to the clients
  Commercial clients like to pay in 30-60 days. It becomes hard to accept this norm as a startup or small business because you have employees to pay every week or 15 days. However, with payroll funding through invoice factoring, you can provide this competitive term to your clients. It allows you to add more clients to your business.
• Flexible
  Your financing options grow as you grow. As you get new orders, you can get more funding through factoring. As long as you add creditworthy clients to your business, you can be confident you won’t face any cash flow problems.
• Opens the way to a conventional financing solution
  Many companies have found factoring to be a stepping stone to transition to a financing resource like a line of credit. Factoring allows you to build a track record to qualify for an alternative financing option.

Which Industries Can Use Payroll Funding?

All industries can use payroll funding. Any business that extends credit or expects payment in return for providing goods or services qualifies as a possible client.

eCapital provides invoice factoring payroll funding to companies such as:

• Small Businesses
• Startups
• Non-bankable Companies
• Staffing Companies
• Janitorial
• Retail
• Utilities
• Financial Services
• Government
• Education
• B2B Services

What are Additional Benefits of Payroll Funding Without Overhead Cost?

• Evaluate the creditworthiness of customers.
• Save money on the overhead cost of keeping accounts receivable or billing personnel.
• Security of data in place related to accounts receivable.
• Save valuable time.
• Enhance and improve collection practices and monitoring of receivables.
• Centralize processing of payments with lockbox services.
• Eliminate the need to send employees to the bank to make deposits.

eCapital Corp

eCapital Corp. is committed to supporting small and middle-market companies in the United States, Canada, and the UK by accelerating their access to capital through financial solutions like invoice factoring, factoring lines of credit, asset-based lending and equipment refinancing. Headquartered in Miami, Florida, eCapital is an innovative leader in providing flexible, customized cash flow to businesses. For more information about eCapital, visit eCapital.com.