What is the Difference Between Invoice Factoring and Payroll Funding?
What is the Difference Between Invoice Factoring and Payroll Funding?
When a business finds itself a bit short on funds, it is not uncommon to look into one of two options; Invoice Factoring or Payroll Funding. While the two might sound similar, there are differences that can help you decide which option best suits the needs of your staffing firm.
Invoice Factoring
A company that provides invoice factoring purchases invoices from companies in exchange for immediate capital. In most cases, the staffing company chooses not to let the invoice run through their internal collections process, which can be lengthy. In this situation, the factor would take over accounts receivable, collecting open invoice funds straight from your customer. This is a level of control your staffing firm should be clear on if they want to give up to another entity. The credibility of these open invoices is the path to which your firm will get approved for payroll factoring. If your clients don’t have solid credit/payment histories, it is likely that your factoring loan will be denied.
Payroll factoring is highly transactional, involving significantly less of a relationship than payroll funding. The factoring company is also much tighter in how they lend, including credit limits and advanced rates with a hard collections process. These companies factor for a wide variety of different businesses and are not specific to staffing agencies.
Payroll Funding
Payroll funding depends equally on the history and status of your staffing firm and that of your clients and is for a more lasting commitment versus a short-term fix. You commit to running your invoices and other services exclusively through a payroll funder where a factor involves meeting a short-term need.
While factoring focuses on invoices, funders commonly provide other services such as payroll and billing. Payroll funding companies are industry specific to staffing firms and foster a more personal approach to their process, such as soft collections. The company essentially becomes a supporting extension of your team.
Looking into the invoice history of your customer as well as considering the length of the loan can help you decide whether to choose payroll factoring or payroll funding. Payroll funding is great if you’re looking for a more long-term solution, while payroll factoring is better suited for a flexible short-term need as long as your customer’s invoice history allows it. If you are in need of a payroll funder, give us a call.