Five Red Flags That Your Payroll Funding Support May Be Coming Up Short
- Red flag #1: Response Times Aren't Prompt
- Red flag #2: Invoice Verification Takes Too Much Time
- Red flag #3: Lending Capacity Isn't Sufficient
- Red flag #4: Credit is Limited for Some Clients
- Red flag #5: Money is Getting Stranded as "unapplied cash">Red flag #5: Money is Getting Stranded as ">Red flag #5: Money is Getting Stranded as "unapplied cash
Meeting payroll accurately, on time, and every time for staffing companies is non-negotiable. The reputational consequences of providing mismanaged wages or unpaid wages are just too high.
In this article, we speak with Dale Busbee, senior vice-president of business development at eCapital Corp. He’s worked both in staffing management and as a funding provider. He understands staffing companies’ needs and challenges to keep their payroll funding in tip-top shape. Here are five red flags, signs that it may be time to keep a closer eye on your funding support.
Red flag #1: Response Times Aren’t Prompt
Slow communication from the payroll funding company can be a significant problem. The staffing company may send a quick email to the account rep, asking to fix a problem, adjust a detail, or access a report. What if, four days later, there’s no reply?
“Staffing goes quickly,” says Busbee, who owned a staffing company for seven years before moving into financing. “Often, when staffing companies ask their lenders questions, they’re trying to complete a payroll, send out an invoice, or apply some cash … I’ve seen funding companies take forever to respond.” If you see any slipping in response times, this could start an unwanted trend and become a red flag to take note of.
Also, watch for turnover at the payroll funding company, as this can contribute to the response issue – when one rep leaves, the new rep will need time to get up to speed. “It’s not a cookie-cutter industry,” Busbee emphasizes. “A long-term relationship with an account rep who knows a staffing company’s preferences is a significant value add. But if your team keeps changing, you may be losing the prompt and helpful support you deserve.”
Red flag #2: Invoice Verification Takes Too Much Time
When working with a payroll funding company, a staffing company should expect to receive advanced payment of up to 95% of the invoices’ face value within 24 hours of submitting for funding. As time is of the essence, any funding delays can jeopardize timely payroll.
As there isn’t much time to spare in the process, a payroll funding company that repeatedly prolongs processes and transfers funds too close to payroll deadlines may be waving a significant red flag. If the invoice verification process takes too much time, the payroll funding company may miss the 24-hour turnaround time. For example, the payroll funding company may be asking for physical verification of invoices which can delay the funding process. Busbee notes: “Invoice verification problems can occur through no fault of your funding partner, but if this becomes a more common occurrence, you may find yourself with a payroll issue lurking down the road.”
Red flag #3: Lending Capacity Isn’t Sufficient
Your staffing company may have initially selected a funding partner based on your current financing needs – but what if those needs grow in the future? It’s another red flag if a staffing company gets the sense that it’s nudging the upper limits of the payroll funding company’s capacity to lend. In this instance, it may be time to reassess the relationship.
“I had a nurse staffing company that had a $3 million facility at the start of the pandemic. They were able to support their business utilizing that facility. Then COVID hit, and their business went through the roof … Hospitals were understaffed, and they were taking anybody and everybody,” says Busbee. “We quickly took that $3 million facility to a $10 million facility to support their growth. And then, again, it grew, and we went to $14 million.”
Not every payroll funding company has the capacity to do that. If yours doesn’t, and you’re growing, you may have to scramble to find a new source of financing quickly or cobble together financing from different sources. Neither option is ideal.
Red flag #4: Credit is Limited for Some Clients
Some payroll funding companies assign a separate credit limit to each staffing company’s client. For example, a $100,000 cap on financing for a specific client may exist. If that client reaches the cap, the payroll funding company may not have the flexibility to extend more credit – which can jeopardize meeting payroll.
Busbee says,, “By basing credit on the staffing company’s overall portfolio, more flexible payroll funding companies avoid the situation where funding is held up because just one client is over its limit.” However, if your current provider doesn’t calculate your credit limit this way, you may find that growth with specific clients creates a credit pain point that you’d rather avoid. Messages from your current provider that you have hit a single client credit limit are a definite red flag, a sure sign that your credit growth may have unexpected limits.
Red flag #5: Money is Getting Stranded as “unapplied cash”
Payroll funding companies advance up to 95% on invoices and hold the balance owing as a reserve until the client’s customer pays the total invoice. The reserve amount should be released promptly to the client once the invoice is fully paid. However, some payroll funding companies direct this money into an account called “unapplied cash” – what Busbee describes as “a black hole.”
Delays in releasing cash reserves can cause problems for a staffing company. Having less money available negatively impacts the staffing company’s ability to make necessary investments in the business or expand operations into new areas. And, if the staffing company has to make back-and-forth calls to the payroll funding company to get the money it’s owed, that takes time and energy away from more essential functions. Staffing companies should be able to track transactions, account balances, and cash due easily. Funds should be deployed quickly, and the staffing company given complete control of its capital management. Anything less is a red flag that may require your immediate attention.
Meeting payroll accurately, on time, and every time for staffing companies is non-negotiable. The repetitional consequences of providing mismanaged wages or unpaid wages are just too high. As a result, you should never assume that your provider will always be there for you, regardless of changes in your operating model, sales territory, or customer focus over time. Always be mindful of your lender’s service performance – be on the lookout for signs that could indicate possible disruptions in support down the road. The red flags described here can be early indicators that trouble with future funding could be brewing.
Heed these signs with extreme caution and take pre-emptive action to investigate a more suitable funding partner. By applying this ongoing diligence, you will always be ready to act quickly should the need to switch payroll funding companies become necessary.
Since 2006, eCapital has been on a mission to change the way small to medium sized businesses access the funding they need to reach their goals. We know that to survive and thrive, businesses need financial flexibility to quickly respond to challenges and take advantage of opportunities, all in real time. Companies today need innovation guided by experience to unlock the potential of their assets to give better, faster access to the capital they require.
We’ve answered the call and have built a team of over 600 experts in asset evaluation, batch processing, customer support and fintech solutions. Together, we have created a funding model that features rapid approvals and processing, 24/7 access to funds and the freedom to use the money wherever and whenever it’s needed. This is the future of business funding, and it’s available today, at eCapital.