In every company, employees are the most critical people that ensure the business runs smoothly and effectively. Therefore it is essential to ensure that they are paid on time to make sure they do their job effectively. However, as a business, clients may experience long net terms, leading to the company struggling to maintain a positive cash flow even if the business is thriving. Therefore in such instances then you have to consider other factors such as factoring for payroll. Payroll factoring permits you to sell unpaid invoices at a discount to a factoring firm or simply a factor. Employees can be paid with the proceeds.
The factoring company takes on the task of collecting payments from your clients, either permanently or temporarily, and keeps a tiny portion of the entire invoice amount as a fee.
There are two types of factoring. These include full-service payroll factoring and no-service payroll factoring.
In full-service payroll factoring, you give the payroll company more responsibilities. In addition to turning unpaid invoices into cash, the company will be processing paychecks, filing tax returns, and other business activities. Moreover, the factoring company handles the business processes. Business Factors provides full-service factoring, including gratis credit checks on your customers, to save your company time and money.
On the other hand, only your invoice is purchased by the factor (s) in no service payroll factoring. Following responsibilities, such as processing the cash, filing it, directing it toward employee wages, and so on, remain your company’s responsibility. This is a good choice for organizations that only require payroll money and do not require extensive business support.
Here are some of the Advantages of Payroll factoring
- It provides working capital to businesses in as little as 24 to 48 hours without the need for a loan or a line of credit.
- In exchange for a nominal fee, it eliminates the wait time connected with collecting payment from customers.
- Factoring businesses can manage accounts receivable for bills they’ve factored, lowering or eliminating the requirement for back-office staff.
- Businesses with positive cash flow can utilize the money to pay their employees on time and expand their business, find new clients, buy new assets, and give their staff more competitive compensation.
- Gives consistency; It is advantageous to a variety of businesses, particularly staffing firms. Since you’ll always be responsible for meeting payroll as the owner of a staffing firm, or you won’t be in business for very long, and funding your payroll with a factor offers you the stability you need.
- It allows your company to grow. Since your factoring company’s financing rises in tandem with your agency’s growth, payroll funding makes it easier to accept new contracts.
Some disadvantages include:
- Customers with good credit are required.
- The interest rates are slightly higher than those of a regular bank loan.
- You must have a customer to bill (must have an invoice)
In conclusion, payroll factoring is beneficial to any company and helps keep your business running smoothly. Also, it ensures, employees are well fully paid.