What is payroll finance? Payroll finance explained

Thursday 3rd February 2022

In this article:

  • What is Payroll Finance?
  • Why businesses use Payroll Finance
  • How you can finance payroll for a small business

What is Payroll Finance?

Payroll finance is a form of small business invoice financing and is specifically designed to help small- to medium-sized businesses make payroll every month. It works like any other form of invoice finance; allowing you to borrow money against the value of (as yet) unpaid invoices so that you don’t have to wait for clients to pay you. Using a payroll finance facility:

  1. You invoice your clients as normal
  2. You can forward your invoices to your finance provider
  3. Wait 24-48 hours, and then receive 80-90% of the invoices stated value
  4. Your factor will then collect the debt from your client; ensuring that you receive a steady stream of ready cash, and always make payroll.

Normally, the factor will take responsibility for managing your payroll, including P32 calculations, pension payments and the raising of wage slips - freeing up time that you can spend improving your business.

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Why do businesses use Payroll Finance?

For any business owner, making payroll is always a top priority. You have a legal obligation to pay your staff on time, and coming up short can jeopardize the future of your company. Failing to make payroll can also put your staff at a huge disadvantage. Even one late payment can be enough to put someone at a serious financial disadvantage, undermine their confidence in your business and demotivate them at work.

Unfortunately, making payroll can be challenging. Particularly if you’re running a relatively new, B2B business. Nowadays, most clients expect 30, 90 or even 150 day payment terms, which means that you could be waiting months for money that’s owed. Meanwhile funding day to day activities; investing in growth initiatives and buying new stock can quickly deplete your cash reserves; leading to cash flow problems at the end of the month.

Growing too fast can also deplete your cash reserves, and leave you unable to make payroll. Particularly if recent growth has forced you to take on new members of staff.

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How do you finance payroll for a small business?

In most cases, payroll finance for small businesses will look a lot like invoice factoring, which is to say that your factor will use their own credit control staff to chase your invoices, and collect payment from your clients. This can be a big advantage - particularly if you don’t have the money to invest in your own credit control processes. But it can also be a bit of a disadvantage, in the sense that your clients will know that you’re using a finance facility. Sometimes, this can damage a client’s perception of your business, which is why some companies will elect for a CHOOCCs (or Client Handles Own Credit Control) facility.

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