Funding Your Payroll Using Invoice Factoring

13:20 28 June in Blog, Business Funding

Ensuring sufficient funding is in place to cover payroll and operating expenses is perhaps the most important task for a business owner. No matter the type of business or industry, payroll funding problems must be avoided, and the best way to do this is to find a source of funding that can provide the right financial solutions.  One common and effective solution for cash flow issues is invoice factoring.

Payroll Funding Through Invoice Factoring

Invoice factoring (factoring) is a very old form of commercial finance that businesses use to accelerate cash flow by selling their accounts receivable, in the form of invoices, to a third party, known as a factor, at a discount.  The business assigns its rights to collect its accounts receivable to the factor in exchange for a cash advance.

Businesses experience cash flow issues for many reasons, with a common reason being Net 30 to Net 90 Day payment terms offered to their customers.  Factoring addresses this and allows a business to convert outstanding invoices into immediate cash flow, which can then be used for meeting payroll requirements. If the sales are there, the potential for business funding is there.

Slow-paying customers oftentimes create cash flow problems for business owners and make funding payroll very difficult, especially when supporting a growing business.  Invoice factoring is an excellent alternative if the business is maxed out on its bank line of credit or unable to obtain a loan.

How It Works

The process is simple.

  1. The client submits an invoice/ progress payment for work that has been completed.
  2. The invoice is verified with the client’s customer (account debtor).
  3. The factor will advance immediate funds equivalent to the majority of the invoice’s amount.
  4. The account debtor remits payment within their payment terms which is typically 30 to 60 days.
  5. When the account debtor pays the factor, the client receives the balance of the invoice amount less a factoring fee.

Qualifications for an Invoice Factoring Facility

Invoice factoring is not a loan. Therefore, qualifying for a factoring facility is faster and easier than qualifying for other solutions. Invoice factoring is available to small and medium-sized businesses, growing companies, and businesses with financial challenges. In general, the business must have the following qualifications:

  1. Unpaid accounts receivable with dependable and creditworthy commercial or government/ municipal customers.
  2. No liens against accounts receivable.
  3. Well-established invoicing practices.
  4. Sufficient profit margin on each invoice/ project.
  5. Competent management.
  6. Be a corporate entity formed in either the U.S. or Canada.

Even if a business has been turned down for a business loan or bank line of credit, they can convert their open invoices to cash almost immediately with invoice factoring.

Advantages of Using Invoice Factoring for Payroll Funding

Invoice factoring offers a number of advantages that address the cash flow needs of business owners, including:

  • Invoice factoring is easier to obtain than a business loan. A business loan application process can take weeks and require a lot of time and effort. And, due to stricter lending requirements, reduced availability, as well as recent bank failures, there is an increased chance that the application may be turned down. The approval process for invoice factoring is much shorter, and approval is easier to obtain, meaning faster access to working capital.
  • Approval for a factoring facility is based on the financial strength of your customer instead of the credit profile and rating of your company. While your company’s credit, integrity, and the way you do business is important, a factoring company is primarily concerned with your customer’s ability to pay outstanding invoices. A factor doesn’t want to purchase accounts receivable that are a problem to collect or become uncollectible. Using invoice factoring for payroll funding can help you build a positive credit history by leveraging the financial strength of your customers.
  • Invoice factoring is not a loan. It doesn’t add debt to your balance sheet or use the available credit on your bank line. It improves your cash flow without borrowing and jeopardizing your credit rating.
  • Funding is fast and flexible. Once funding is approved, cash for invoices submitted for factoring can be available almost immediately.  A factoring facility can be tailored to meet the needs of your business model.
  • The amount of funding can be increased as your business grows. Factoring allows you to increase volume with existing customers and add funding for new creditworthy customers.
  • Enables business growth. With the cash available from factoring your invoices, you can go after new business opportunities and large orders that you may not otherwise be able to pursue due to a lack of funding. You can purchase materials and pay employees and operating expenses now and not have to wait 60+ days for customers to pay their open invoices.
  • Continue to offer competitive payment terms. Invoice factoring makes it possible to continue offering generous payment terms to be competitive.

Payroll funding problems are a common issue for small and medium-sized companies. If your business is not able to meet its payroll, the priority must be to secure funding from an alternate funding source in order to not harm your business’s credibility and financial health.  Invoice factoring offers many advantages that enable you to meet your needs for cash flow to pay employees and operating expenses as well as fund purchases of materials and inventory.

Capstone knows that every business is unique with its challenges, and each deserves an individualized approach to solving its cash flow shortfalls. With flexible factoring structures, Capstone will customize a program specific to your business that will help you achieve your business goals. By utilizing invoice factoring, you can shift your focus from waiting on cash to working on your next project without the stress of inconsistent cash flow or how you will meet payroll requirements.

Making payroll is one of the biggest responsibilities for a business owner, and the success of your business depends on it.  Please contact Capstone to discuss an invoice factoring facility for your business.

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