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Payroll Loans Versus Payroll Factoring

Comparing Payroll Factoring vs Payroll Loans

Payroll shortages are commonly observed in various industries, particularly the staffing and temporary personnel industry. Companies operating in this sector often face challenges in meeting their payroll obligations due to fluctuations in demand for their services. Additionally, industries that experience seasonal dips in income are also prone to encountering payroll hardships. These fluctuations in revenue can pose difficulties in ensuring that employees are paid on time.

Unsteady cash flow is common for start-ups and other small businesses. Lack of capital makes covering necessary expenses like employee payroll especially difficult. Fortunately, there are several options small businesses can use to make sure their workers are paid in full, on time.

Payroll Advance vs. Payroll Funding

Payroll advance and payroll funding are two distinct methods that individuals and businesses can use to cover their payroll obligations.

A payroll advance is a type of personal loan that allows an individual to receive an early payment from their future paycheck. This advance is typically provided by a lender in exchange for a flat fee and is usually required to be repaid within a few weeks. It is important to note that payroll advances carry a relatively high interest rate, and if the borrower fails to repay the advance, the lender may take collection actions and report the default to credit bureaus.

On the other hand, payroll funding refers to a process by which a business secures the necessary funds to meet its payroll requirements. Normally, companies have reserves in their bank accounts to cover their payroll expenses. However, if a business is lacking sufficient funds, it can opt to sell its invoices to a factoring company, which provides payroll funding. Unlike a loan, payroll funding involves selling the business’s accounts receivable, which means there are no repayment obligations. This transaction helps the company receive cash upfront, allowing them to fulfill their payroll obligations and maintain smooth business operations. Importantly, since there is no repayment requirement, there is no risk of default or negative credit reporting associated with payroll funding.

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What’s the Difference?

Payroll loans and payroll factoring sound similar, but there are several key differences between the two that can have a long-term impact on your company’s ability to do business. Which one is right for your small business?

Payroll Loans

Payroll loans include short-term loans and business cash advances. They offer small amounts of money, deposited into your account on the business day following approval.

Here’s how a payroll loan process works. A small business borrower goes to a lending service and provides a postdated check for the total loan amount plus interest fees. On the specified due date, the borrower returns to pay the loan in full. If the loan is not repaid, the lender is legally entitled to redeem the check and the borrower is held responsible for the value of the check as well as any bounce fees that may be incurred. Some lenders also charge higher interest or additional fees for delinquent loans. Interest fees range from 15-30% for a single loan.

Business cash advances (also similar to merchant cash advances) are different than a payroll loan. They are based on your anticipated sales and automatically deducted from your bank account or credit card sales. Business owners receive a lump sum and are expected to repay the advance within a specified time period, usually between 6 and 12 months. Business cash advances are repaid through either daily or weekly withdrawals from your bank account. No collateral is required, but business owners are expected to provide at least 6 months of bank statements in order to qualify.

Small businesses can benefit from payroll loans for short-term cash crunches, but they are not a viable long-term funding solution. Also, the high interest rates and strict repayment terms put small businesses at risk for compounded financial difficulty down the road. These should only be used for growth-related activities.

Payroll Factoring

The immediate difference with payroll factoring is that it is NOT a loan at all. In a payroll factoring relationship, a small business sells its open, current accounts receivable to a factoring company. The factor will advance 80-95 percent or more of the invoice amount, in cash, within 24 hours of invoice receipt. Factoring companies even work directly with your customers to collect. Once the invoice is paid, the factor will remit the amount held in reserve minus a small factoring fee.

Small businesses can use payroll factoring as often as necessary to maintain a solid level of working capital, even if earlier invoices have not yet been paid. Unlike the high interest rates charged by payroll loan providers, payroll factoring rates are typically as low as 1 to 3 percent and begin accruing when the invoice is purchased instead of when it is issued.

Companies with poor, little, or no business credit can qualify for payroll factoring because factors base their funding decisions on the credit rating of a business’ customers. Approval can take as little as 3 to 5 business days and businesses can receive initial funding within 24 hours of account setup. Even if you’ve only been in business for a month or two, if you  have outstanding invoices, you’ll be eligible for this type of funding.

Other Advantages of Factoring for Payroll:

  • Back office support to save you time and money
  • Amount of available funding grows with your sales
  • No up-front fees
  • No debt to repay
  • Credit recovery and establishment for startups and struggling businesses

A Third Option – Unsecured Business Loans

Payroll factoring, while a business-friendly financing solution, is not a possibility for most businesses that bill consumers. However, there is a third option: unsecured business loans. Unsecured loan approval is often based on your business cash flow, not your business assets. No collateral is required and businesses with less than perfect credit can qualify. Factor Finders has relationships with a number of unsecured lenders who are ready to help your small business build cash flow without jumping through the hoops of traditional lending.

Staffing and Payroll Factoring with Factor Finders

Factor Finders has a nationwide network of payroll factoring companies to serve every industry, from construction and transportation to healthcare and oilfield service providers. Call 1-855- FACTOR-1 today or click to request a free quote and information on the right factoring company for your funding needs.

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