Many companies, especially small businesses, have a tight cash flow for their formative years. At the end of each regular work period, when it is time to make payments to their employees, they may run a strong possibility of missing the payroll. The companies may be left with no funds to make the timely payments if they depend on collecting funds from their clients, which itself is a time-consuming process.
In such cases, where the company has several outstanding invoices waiting to be paid, payroll factoring may benefit them. The invoices can be exchanged for a loan from the bank or any other legitimate money-lender by this process. The concept of payroll invoice factoring recognizes the hard work put in by the sales and marketing team of a company and facilitates small businesses based on that.
A company’s outstanding invoices are taken into custody by the bank or the money-lender after being run through credit checks. In exchange for these, payroll is dealt out to the employees of the company. The employees get paid first, and then the due is collected from the company when they have cashed out these invoices.
Invoices are the collaterals of brand companies and small businesses alike; they maintain the corporate cash flow. The factoring agents dole out cash or deposit the money on payroll cards depending on the value of a percentage of these invoices, if not all of them. The company has to provide the payment details of their employees, like their social security numbers and salary amounts.
There are two options to choose from – recourse and nonrecourse. By the recourse option, the company assumes all the loan responsibilities if their customers do not pay up. On the other hand, by the nonrecourse option, the factoring agent agrees to suffer the losses in the case of such a payment failure.
Payroll factoring helps the company to avoid incremental debts while trying to meet its payroll obligations. It provides easy access to money for each payment period and allows companies to take on more business while not worrying about finances.
A commercial loan would require more time and paperwork. But the factoring of invoices gets the company the required finances within a short time.
Collecting receivables can be extremely bothersome. If a company hires factoring agents, the receivables are collected by them. This can also lead to the company engaging fewer employees to keep track of their accounts receivables. The surplus amount can add up to the company’s profits.
Invoice factoring can especially help out companies coming out of bankruptcy. Some factoring agencies look for more creditworthiness of a company’s customers rather than the company’s credit score. This can be advantageous for companies to meet their payroll obligations.
The best thing about hiring a factoring agency is that the company does not have an obligation to continue its services as and when needed. With predetermined fees and clearly stated conditions, factoring can be the best solution for fulfilling a company’s payrolls.