Comparing Payroll Factoring vs Payroll Loans
Unsteady cash flow is common for start-ups and other small businesses, which makes covering necessary expenses like employee payroll especially difficult. Fortunately, there are several options that small businesses can use to make sure their workers are paid on time and in full. Below, compare two such options: payroll loans and payroll factoring. 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 include short-term loans and business cash advances. Payroll loans are short-term loans for small amounts of money that is deposited into your account on the business day following approval.
Here’s how a payroll loan 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 since 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 (6-12 months typically). 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.
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, and will 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
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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.