When you are an entrepreneur, particularly a small business owner, having the necessary cash flow to operate normally can be complicated. If part of your concern has the money to pay your payroll on time, keep reading.
Sometimes situations get complicated, and even though the date for paying your payroll is approaching, you do realize that you don’t have the money necessary to pay it. It’s not because you haven’t made any sales but because your clients won’t pay for them until the due date, which creates a cash flow gap and major economic complications. If this happens, you can resort to payroll factoring.
Payroll factoring is a financing option in which you can sell your invoices with due dates between 15 and 120 days to a third party outside the business relationship with your client. The factoring company would analyze the invoices sent by studying your client’s credit information to see how easy it will be to collect the debt once the due date. The invoices you submitted are approved, it will advance a percentage of the total amount of them.
And once the client pays the invoice, the factoring company will deduct their fee and pay you the rest. The amount of the fee that the factor will charge depends on many elements, including the number of invoices you sell to them, the amount of your customers’ debts, the due dates of the invoices, the credit history of your customers, whether you have sold to them before, and most importantly, whether the factoring is done with recourse or without recourse.
In payroll factoring, since you have sold the invoices to the factoring company, it is the factor that assumes the costs and takes the necessary steps to collect the debt once the due date has arrived. If your factoring contract is with recourse, if your client does not pay the invoice, he will be responsible for that debt to the factoring company. On the other hand, if your contract is with a recourse company, that means that the factor assumes the customer’s e risk of default, so in that case, you would lose money. In this case, the factor’s fee will be much higher than in the first case.
Payroll factoring regularly offers the option of taking control of your payroll payment; it becomes something like a phantom partner who will pay them on a payroll card instead of giving a check to your employees. If you don’t like this option, you can continue to control all the steps necessary to pay your payroll, that is, you remain fully responsible for the payment of taxes and Social Security contributions of your employees.
Factoring offers simple access to cash, and you don’t need to dismiss business for a lack of accounts. You likewise have the alternative of acquiring precisely what you need as indicated by the particular circumstance with which you’re managing at that point, and you don’t need to trust that your customers will pay on their accounts to raise the cash you need.