Payroll Funding — The Basics
In staffing, the most basic type of payroll funding is through asset-based lending credit lines secured by your receivables. The lender will cover a percentage of your payroll based on submitted timecards. With the right level of funding, you are assured that your contractors will be paid regardless of amount. Generally, “payroll funding“ is a misnomer. Many lenders will actually fund a percentage of your invoice instead of just your payroll. The percentage can vary from 75% – 100%.
Payroll funding is flexible. Approval is based on the creditworthiness of you and your customers. This allows a funding company to fund startup businesses and other rapidly growing companies that often find themselves unable to get the hoped-for cooperation from their local bank. Banks examine a company and its personal guarantors in depth. This examination usually requires three years of financial statements, a cash flow analysis, and collateral appraisals. It can take weeks (and sometimes months) to complete. And, if a business is lucky enough to obtain a line of credit, that line is typically for a fixed amount. This finite borrowing capacity often limits the growth of that company.
A daily rate is what most funding companies charge for asset-based loans. A daily rate is what is charged above and beyond your advance rate. The advance rate is charged on day one and typically covers 30 to 50 days. After that, interest is charged on a daily basis. This means that the funding company charges a flat fee on the initial invoice balance followed by a daily rate after the 30 days until the invoice balance is paid in full. A partial payment on an invoice does not stop the daily rate from being charged and it continues to be charged on the original invoice balance. Unless your customer pays well within 30 days, and very few do, the advance rate combined with a daily rate is typically a much higher amount than you would pay with a flat fee. With this type of arrangement, your customer controls your fee. This makes predicting cash flow and budgeting significantly challenging and, if your customers are slow payers it can become very expensive.
With tier-based funding from Madison Resources, you gain access to multiple levels of pricing that decrease as you grow. We offer a flat fee (advance rate only) for all invoices paid within 90 days. However, we provide a tiered structure that is volume based. So, as you grow your business volume, your fees will automatically drop to the lower fee structure. Instead of your customers controlling your cost, you do. You gain more control and value from our tier-based model than you would from a bank or other funding company. We provide you more wiggle room for your customers to pay your invoices and do not assess additional interest. You can afford to go after those larger accounts who are pushing for longer and longer terms. You gain greater predictability to plan your costs and create budgets.
Here is an example. Let’s assume you have $10,000 in invoices for the week. With another funding company, you pay an advance rate of 2.1% for 30 days and .06% daily interest. Let’s assume your customer pays at day 64. You will pay an advance fee of $210 and interest of $204 ($6 daily for 34 days) or a total of $414. With Madison, your advance rate would be 4.00%. Your total fees would be $400 even if your customer’s payment doesn’t arrive until day 78. If your volume increases to $50,000, then your advance rate drops to 3.5% and your fee to $350.
It’s easy to get caught up with a low quote but it’s important to understand what the low rate covers and for how long. Madison is able to compare your offers with calculations based on your forecasted business so you can make an informed decision when looking for a funding company to partner with.
There will typically be a contract that protects both parties. You will want to make sure you understand the terms and look for hidden fees and unexpected clauses not previously covered.
Do your diligence – look for a company that caters to your industry and understands your business. Get details on all of the services available and read the fine print – there is often a gap between what a talented salesperson promises you and the legally binding contract. How much of the payroll will they fund? Do the fees increase as invoices age? When do you have access to your profits?
Payroll Funding with Madison Resources
Madison is the most dedicated staffing-specific outsourced service provider in the market. Madison is the only provider who owns all their own technology, has a full-time development staff delivering new technology regularly and is owned and managed by staffing industry executives. We know your business and we are dedicated to helping staffing companies become more profitable.
The following (and more!) is covered under one, easy-to-decipher fee:
- Payroll Processing
- Payroll Tax Filing & Reporting
- Billing, Credit & Collections
- Cash Applications
- Annual W-2 Processing
- Online Time Sheets & Payroll Stubs
- Online Payroll Processing (OPP)
- In-house Development Team
- ATS / CRM*
- Madison Online Solutions (MOS)
- Performance Analytics
- Expert Advice
*Our ATS / CRM was built specifically for staffing
We do offer a funding-only option. However, we encourage you to take a look at our full-service model. We think you will find that having Madison take care of your back office will provide benefits and value beyond what you might expect. We are available to provide you with a no-obligation consultation to assess your needs and processes. We’ll let you know how we can best help support your business and goals.
Madison will provide you with tools that will change the way you look at your business. Our Performance Analytics tool contains an unprecedented level of detail. Created just for you by our finance and technology departments, here are just a few of the features of Performance Analytics that we think will help your staffing firm become more profitable:
Once logged in, you will be presented with easy-to-read graphs that represent Sales, Gross Margin, Profit, Headcount, Mark up and Aging at a glance (and graphs are customizable).
Drill down to key data including tax withholding and chargebacks, down to employee hours and bill rates – as granular as you ever thought you needed to be.
The tool provides you with a separate income statement, balance sheet and cash flow statement
Customize And Compare
Customize your view to compare your data week to week, month to month, year to year or any non-sequential timeframes you need to analyze your data in order to identify trends and opportunities to increase profitability. Coupled with our Madison Online Solutions (MOS) and expert advice, Madison provides you with the resources you need to become more profitable.