What Is Payroll Financing?

May 24, 2023

Payroll Financing, also known as invoice factoring in other industries, is a form of working capital financing designed specifically for the Temporary Staffing Industry. It provides staffing companies with access to a significant portion, typically 90-95%, of their outstanding accounts receivable. This ensures that they always have cash available to meet payroll expenses, pay taxes, and cover other operational costs associated with running a staffing business.

One of the key advantages of payroll financing is that the cash is readily available, regardless of when the staffing company's customers make their payments. Whether it takes 7 days, 30 days, or even 90 days for customers to pay, this financing solution offers consistent cash flow. This allows entrepreneurs to start and grow their temporary staffing companies without any limits, as the factoring line of credit expands alongside their business.

Now, let's delve into how payroll financing works on a day-to-day or week-to-week basis.

Once the client is set up for funding, the process becomes smooth and straightforward. Typically, the staffing company submits invoices and supporting timecards to the payroll financing company for the preceding week. This allows them to secure funding for the upcoming payroll. The payroll financing company reviews these invoices and timecards to ensure they match up, and verifies that the customers will make the required payments. Subsequently, approximately 90-95% of the total value of the invoices is promptly transferred to the staffing company, while the remaining 5-10% is held in a Reserve Account until the invoices are paid.

The staffing company's customers are directed to make payments to the payroll financing company. Upon receiving payment from the customers, the funding fee is deducted from the payment, and the remaining 5-10% is made immediately available to the staffing company upon request. This funding cycle typically repeats on a weekly or bi-weekly basis, forming a seamless and effortless process for both the staffing company and their funding partner.

Ultimately, payroll financing ensures that staffing companies always have access to the necessary funds to fulfill their payroll obligations. The payroll financing company typically charges a fee ranging from 1% to 3% for providing this service.

How Does a Staffing Company Qualify for Payroll Financing?

Qualifying for payroll financing is a straightforward process. The primary requirements that a payroll financing company looks for when onboarding a new client are the quality of the invoices and the customers' ability to pay their bills. By providing a simple customer list, the payroll financing company can assess the creditworthiness of the customers by checking with credit bureaus. This helps determine if the customers are likely to pay their invoices.

Staffing companies make excellent candidates for factoring as they usually have signed timecards accompanying the invoices, providing evidence that the work has been completed. Beyond these factors, the payroll financing company simply wants to ensure that the business has a viable plan and operates as a legitimate legal entity. At Meritus Capital, there are no specific requirements regarding credit scores, time in business, or volume of business to qualify for payroll financing!

Payroll Financing: Explained and Essential Considerations

Payroll financing, also known as payroll funding, is a valuable financing solution for the staffing industry. It allows staffing companies to access a significant portion, typically 90-95%, of their outstanding accounts receivable. This ensures that they always have the necessary cash flow to meet payroll obligations, pay taxes, and cover other operational costs associated with running a staffing business.

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Basics of Payroll Financing Different payroll financing companies offer varying services and features. It's important to gather key information before engaging with a specific provider. Consider the following:

  1. Fast Funding: Choose a payroll financing company that offers same-day, or next-day funding through wire or ACH transfers once you submit your invoices and timecards.

  1. Advance Rate: Inquire about the percentage of your invoice value that will be advanced to you immediately, as well as the percentage held in reserve. Advance rates typically range from 80% to over 95%. Ensure that the offered terms align with the needs of your staffing company.

  1. Minimums: Some factoring companies require a minimum financing amount or charge minimum fees per month. Others offer flexibility, allowing you to utilize the accounts receivable financing facility as needed. Long-term contracts or specific volume commitments may be beneficial in certain cases.  Ensure that you have a valid reason for such arrangements, such as cost savings.

  1. Full-Service Funding: Certain payroll financing companies provide full-service options, handling back-office tasks, like employee payment, payroll tax filing, issuing W-2 forms, invoicing, and collections. This relieves you of administrative burdens, enabling you to focus on core activities like filling positions.

  1. Credit Protection: Some payroll financing companies offer credit protection through credit insurance, safeguarding you in the event of customer bankruptcy. If this is important to you, communicate your preferences to the companies you are considering. Note that credit protection may involve additional costs, but it offers peace of mind compared to scenarios where uncollected invoices, due to bankruptcy, are charged back to you.

  1. Credit Analysis: Many factors provide credit checks for new customers and offer insights into the likelihood of timely payments. This information is crucial for staffing businesses. Choose a payroll financing company with extensive experience in credit analysis.

  1. Online Reporting: Access to real-time reports and information is vital. Ensure that the payroll financing company you select provides an online reporting system, offering 24/7 access to essential reports such as purchase and advance reports, collections reports, reserve reports, and aging reports. These tools help you stay informed about your business's financial status.

Benefits of Payroll Financing

By opting for payroll financing, staffing companies can enjoy several benefits:

  • Access to necessary funds for each payroll period.
  • Capital for rapid business growth.
  • Expertise in credit and collection, assisting in informed decision-making.
  • Cash infusion without incurring significant debt.
  • 24/7 online reports to track billings.
  • Partnership with a provider dedicated to your success.

Is Payroll Financing Common for Staffing Companies?

Absolutely! Thousands of staffing entrepreneurs worldwide leverage payroll financing or invoice factoring to grow their businesses. Qualification primarily relies on the creditworthiness of the staffing company's customers, making this form of financing accessible and popular.

Availability of Payroll Financing

One of the advantages of payroll financing is that it is not limited to companies in specific cities or towns. You can partner with a payroll financing company anywhere within your country. Meritus Capital provides payroll financing services for businesses across the USA and Canada from their central office. The application process and week-to-week funding are accessible through online portals and email.

Does it really work?

The best way to assess the effectiveness of payroll financing is by examining successful partnerships between payroll financing providers and staffing companies. Here are a couple of examples:

These success stories illustrate how payroll financing can be a valuable and effective financing option for staffing companies, helping them overcome financial obstacles and seize growth opportunities.

Boosting Growth with a 40% Reduction in Factoring Fees: A Success Story.

Challenge: Our California-based client partnered with a factoring company to support their growth aspirations but faced challenges due to poor communication, lack of transparency, and outdated processes.

Solution: Meritus Capital stepped in to provide a transformative solution. Through our partnership, we equipped the client with the resources and guidance needed to sustain and accelerate their growth. By increasing advance rates and reducing total factoring fees by approximately 40%, we optimized their financial operations.

The client expressed ongoing satisfaction with improved customer service, including timely fundings and professional communication. Our partnership has empowered them to pursue their growth ambitions with renewed vigor.

With the burden of excessive fees alleviated, the client can allocate resources efficiently, reinvest in their business, and focus on strategic initiatives. This success story demonstrates our commitment to delivering tangible value and helping clients maximize their financial potential.

Direct Hire Business Fuels 13X Growth of New Contract Staffing Division

Challenge: Our client, a well-established staffing company specializing in direct hire placements, faced the challenge of expanding into the temporary or contract staffing market. They had concerns about the time and capital-intensive nature of this industry.

Solution: Meritus Capital partnered with the client to provide a payroll funding line, enabling them to meet the capital requirements necessary to venture into the contract staffing sector. By addressing their overhead capital needs, we empowered the client to support payroll and facilitate ongoing growth in this new vertical.

With our support, the client successfully capitalized on the demand for contract positions, experiencing a remarkable 13X growth in their new division. Our payroll funding line provided the financial stability necessary to fuel their expansion and seize market opportunities.

By diversifying their service offerings, the client now caters to a broader range of staffing needs, attracting new clients, and generating additional revenue streams. The partnership with Meritus Capital has been instrumental in their journey towards success in the contract staffing market.

As a trusted partner, Meritus Capital remains committed to supporting our client's ongoing growth and ensuring their continued success in the competitive staffing industry. Together, we navigate the challenges, capitalize on market trends, and drive sustainable growth for their business


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