When it comes to businesses and organizations, employees are the most valuable investment. Without them, the organization can not manage to produce the necessary output to stay afloat. They must get the proper motivation to work. One of these is receiving compensation on time.

However, that’s not always the case. On days when the business is slow, companies can delay the payroll. They have to find ways to pay the workers or risk losing the workforce. Luckily, in the modern world, there many financial solutions exist for businesses. Examples include business loans, invoice factoring, payroll loans, and payroll factoring.

This article compares the latter two payroll funding sources.

About Payroll Loan

A payroll is a short-term loan arrangement with a financial institution like a bank to access funds to pay employees.

This type of loan demands a short repayment period from the borrower. A Payroll loan differs from a traditional loan because it has a specific task to cover a payroll cycle. Due to the short repayment period, it also tends to have a higher interest rate. Not to be confused with payday loans either, which is a consumer loan with very high-interest rates. In some states, it is even illegal.

About Payroll Factoring 

Payroll factoring is a method of financing the paycheck by selling invoices for a cash advance. The company buying the invoices charges a discount fee that translates to paying the borrower 80 or 90 percent of the actual invoice amount.

The factoring company remains with the task of collecting the payment from the business owner’s customers.

Payroll factoring differs from invoice factoring in terms of use. Whereas invoice factoring is selling invoices for general business needs, payroll is specific for offsetting employee salaries.

There are two types of payroll factoring. No service and full service. In no service factoring, the business owner sells invoice(s) for cash only. Full-service factoring is where the factoring company does more than buying the invoices. It will also process the paychecks, file returns, and collect payments from the customers.

How it Works

The simple process of factoring invoices for payroll is as follows;

The business sends the customer(s) an invoice and then sends a copy to the factoring company. It is paramount to send customers the invoice first.

Indicate which invoices to factor. 

The company verifies the credibility of the customers.

Once the factor approves the invoice, he sends a portion of the cash advance according to the factoring agreement.

Upon the agreed period, the customer pays the factor for the invoice.

The factor sends the remaining amount minus the discount fee and any other charges.

Importance of Payroll Factoring

It can be a savior for the company when there are unforeseen cash flow problems. Payroll is the ideal way to meet salary deadlines during hard times.

Using full-service factoring helps eliminate the hassles of handling related business processes.

It is a quick way to access funds.

It boosts the business cash flow, ensuring the business continues to operate instead of waiting for invoices to get paid.

Which is Better: Payroll Loan or Payroll Factoring

The two sources of funding a paycheck are useful for the same situations but, some factors may give one an advantage over the other. How do they compare?

Speed

Factoring is quicker than a loan. Upon request, a factor can send the advance in a few days. But, a loan takes much more time to process for up to three months.

Cost

Loans typically charge interest on the principal amount. Since payroll loans are short-term, they have higher rates than regular business loans. Factoring, on the other hand, is not a loan that means the business stays debt-free.

Full-service factoring has the advantage of offering back office support for the business.

Unlike loans, payroll factoring allows a business to access funds even when payments from previous invoices are still pending.

Qualification

Small and new businesses are eligible for payroll factoring as long as their customers have a clean payment record.

The Bottom Line

Payroll factoring is a more convenient and effective way of offsetting the paycheck. It comes with benefits such as fewer limitations, lower costs, speed, and support services.

Also Read: Are You Looking To Instant Loan To Finance Medical Emergencies?