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How Does Payroll Factoring Work

Many businesses fail in their first year because they are short on cash. Even if orders are coming in, they don’t always have the funds to pay their employees and other expenses before they can collect on their invoices. Payroll or staffing factoring in Alpharetta is a great way to make payroll without going into debt. But how does the process really work and when can you use it?

No Money for Payroll?

Small companies often have cash flow problems. In fact, employees of smaller companies may even cash their paychecks right away because they’re afraid that there aren’t enough funds available if they wait. If you don’t want to issue paychecks that bounce, it’s a good idea to look into payroll factoring instead.

To do that, you must take a look at your company’s outstanding invoices. Those are the invoices that have been issued to the customer or client but haven’t been paid yet. It’s okay if they’re not due for payment for a while, too. You can still get cash for them now by taking them to a factoring company. In return for the right to collect on that invoice, the factoring company will pay you in cash right away.

Invoice Factoring Process

The factoring company pays you a percentage of your invoice within a day or two even if they can’t collect on it for another couple of months. This allows you to make payroll to keep your employees working for you and generating more profits. When your customer pays the invoice, the factoring company will pay you the rest of the balance minus their fee. You can keep repeating this process with as many invoices as you want.

The great thing about payroll factoring is that you don’t have to worry about collecting on those invoices, either. In essence, the factoring company handles your accounts receivables. They can even take care of the payroll for you with the money from the invoice factoring.

Advantages of Payroll Factoring

In an ideal world, your business generates enough cash to pay your employees and regular business expenses. But even if you turn a profit at the end of the year, it often takes longer to collect payments, which requires a large savings fund or short-term financing. Payroll factoring is the best way to finance short-term cash needs, because it doesn’t put your company in debt since it uses your receivables. It basically switches one asset (a receivable) into another type of asset (cash). Additionally, your business doesn’t have to have a great credit history, because it’s about your customers’ creditworthiness and not yours.