Payroll factoring provides a quick way to convert outstanding receivables into cash for the remuneration of employees. Invoices get sold at a discount to a third party, a factoring company. The proceeds get used to pay the employees, with the factoring company assuming customers’ payment collection responsibility. In addition, the factoring company gets to buy only a few of the invoices known as spot factoring and can alternatively purchase all of them, which is known ass full-turn or whole ledger factoring.
Payroll factoring defines how payroll factoring works for a complete and easy understanding of the whole process. There are four simple steps that companies take to factor their invoices to facilitate the easy payment of their employees in time. First, the business provides a factor that has a copy of the invoice sent to the client, the account debtor. After which, the factor thoroughly verifies the invoice, running the necessary credit checks on the debtor account. The third step involves the factor advancing a portion of the outstanding amount. Finally, when the invoices get paid, the business receives the remainder amount short the discount rate and any other additional fees, which marks the final step of the payroll factoring.
Payroll factoring comes with several advantages to the business hence its use in the timely preparation of the payrolls. Some of the benefits include:
- The process provides businesses with a quick working capital within 24 to 48 hours without the company having to take loans or open a credit line.
- The customers’ payment collection wait time gets eliminated in exchange for a small fee for the factor, which brings the responsibility to collect the invoice payments and pay the company their money less the discounts and the agreed additional charges.
- The factoring companies take over the account receivables management for the factored invoices minimizing or eliminating the need to have back-office staff.
- The process provides a positive cash flow that enables the company to pay employees in time and achieve various financial requirements. Expansions, search for new clients, the purchase of new assets, and the provision of competitive salaries to the employees are examples of the capacity the cash flow gives to the company.
There are two significant kinds of payroll factoring that work effectively for the company’s benefit and, by extension, the employees who receive their remuneration and benefits in time. The factoring methods include:
In this kind of factoring, the factor only purchases the invoices with the company retaining the responsibility of performing the subsequent tasks. Some of the tasks include cash processing, filing, and directing the cash to employee salaries. The factoring works best for businesses that require a payroll funding solution without any comprehensive business support.
Full-service payroll factoring
As opposed to the no-service factoring, the full-service factoring gives the company additional responsibilities that include filing tax returns, processing paychecks, and other business tasks. In this case, the processing business gets outsourced to the factoring company, offering full factor service savings.