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How Payroll Funding Works: An Alternative Way To Help Finance Your Small Business

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One of the challenges that many small businesses and startups encounter is seeking sufficient funds to allow the venture to grow and thrive. Unlike larger companies with more stable financial resources, it is more likely for small businesses to struggle with inconsistent cash flow, unplanned expenses, repayment of debt, and payroll expenses.

While it is typical for businesses, whether small or large, to encounter monetary challenges once in a while, startups and small businesses may find it more challenging to bounce back from these.

What Sources of Funding are Available to Small Businesses?

Starting a business requires a significant amount of capital, and there are different sources of funding that entrepreneurs can look into. Aside from using your own money to fund your startup business, here are some of the common ways small businesses can obtain funding. 

  • Money from family and friends
  • Credit card cash advances
  • Angel investors and venture capitalists
  • Grants and subsidies from the government
  • Business loans from financial institutions
  • Crowdfunding
  • Payroll funding

Understanding How Payroll Funding Helps Finance Small Businesses.

It does not matter what niche or industry you are involved in or the type of business you operate; your staff must get paid on schedule. However, it is reasonable to stumble upon financial challenges while you are in the process of growing the business. Payroll funding allows you to sell the company’s invoices in exchange for cash.

Many business clients do not pay after work is completed. Payments are usually received after 30 to 60 days, which can deplete your financial resources. Payroll funding is a viable solution for this problem as it covers the company’s payroll expenses. This means that you don’t have to depend or wait for your clients’ payments. Here are the things that you should know about payroll funding:

1. Payroll Funding Has Different Rate Structures.

The simplest rate structure is most popular, but business owners can also opt for the daily rate structure or the net funds employed structure. Each rate structure has its own set of benefits and disadvantages. The daily rate structure, for example, is the simplest rate structure in comparison to the net funds employed and tiered rates structure. However, the net funds employed scheme is a better option for those who prefer financing rates that are more formulaic and foreseeable. Tiered rates, on the other hand, may offer lower rates for a higher volume of invoices, but it is best to review your terms carefully to make sure you are saving money. 

2. Payroll Funding Is Not a Complicated Process.

Although payroll funding is not as well-known as other financing options, it is easier to obtain than getting a loan from a bank. First, you need to find a reputable payroll funding company. Prepare the company’s invoices (to clients) and send them to your preferred payroll funding company. You may receive the funds based on your invoices within the same business day, depending on the process of the payroll funding provider. Once your client makes the payment, you will receive any excess funds from the invoice after the payroll financing company deducts the amount your company owes plus any fees, as stated in the agreement.

3. Payroll Funding Offers Flexibility and Convenience.

Payroll funding can be utilized by companies from various industries. One of the advantages of obtaining payroll funding is that the financing option continues to increase as your business grows. You can get higher cash advances as you get a new and higher volume of jobs. Another advantage of payroll funding is that you are not tied up to any long-term loan contract or agreement. You will be free from any financial obligation once your creditworthy clients settle their invoices.

4. Payroll Funding Allows You to Focus on Other Business Matters.

Growing a business is hard enough without the challenges of funding your payroll. Small businesses and startups may have limited cash reserves that cause business owners stress and anxiety. The good thing about payroll funding is that you can focus your energy on other crucial aspects of the company such as improving business processes and generating new customers. Obtaining payroll financing lets you forget your worries about having sufficient funds for wages. The funds can also be used for other shortages in cash flow, but in general, the money is used to make sure employees are paid on time.

Conclusion.

Payroll funding, if used correctly, can save your business from financial distress, especially if you are a startup company. This type of financing gives your business access to consistent cash flow without adding too much debt on your balance sheet. Before deciding to obtain this type of funding, weigh your options to understand whether it can indeed help your business grow and succeed.