What Is Payroll and How Can I Find Funding for It?
When your business is experiencing cash flow problems, payroll is not one of the expenses you should compromise.
If you skip out on paying employees, there can be severe consequences. Not only are you interrupting the livelihood of your employees who depend on their paychecks, but you could face some legal issues as well.
So please don’t risk it! There are ways for you to pay your employees so you never fall short come payday.
What is payroll and how can I get funding for it? Payroll is the act of paying employees while taking out state and federal taxes. Read on to learn how to get financing for your payroll.
What is Payroll?
The IRS defines payroll as the payment of taxable income. Payroll are the wages you pay to employees for work that has been performed. Simple enough, right?
Payroll also refers to the system your company uses to pay out wages. You may have your own internal system, or you may use one of the many available online payroll services, like Paychex, ADP, or QuickBooks, to name a few.
What Can Go Wrong With Payroll
Unfortunately, many businesses find themselves unable to pay their employees. Even before the pandemic, a company might land in any number of situations hobbling its ability to fund this necessary expense.
For example, startups sometimes fall short on their initial payroll if it’s more than expected and they get behind on paying employees. Running a company is usually more expensive than people anticipate, especially at the beginning.
New companies often underestimate how much they’ll need. Also, if they have the fortunate problem of growing too fast, payroll is one of the areas that could cause cash flow issues. Tech startups with tons of venture capital know what an expense paying employees can be, and are notorious for paying them with shares of stock instead of actual wages.
Wages Are an Expense
Employee wages are one of the biggest (if not the biggest) regular expense a business faces. It’s no wonder that many businesses scramble to find ways to pay their employees, especially when things get tough.
Emergencies happen every day that can slow up cash flow. Business can be painfully slow. Clients can take forever to pay their invoices.
Whatever the reason, payroll is one area where you can get into some serious trouble by not paying on time.
Not paying employees can get you into trouble with the Fair Labor Standards Act. The Department of Labor will come down pretty hard on you for these types of issues, not to mention potential lawsuits from angry employees and fines and fees for delinquent payroll taxes. All in all, it can ruin your business.
It’s just not worth it.
The Problem of Unpaid Invoices
Nevertheless, issues happen. Pandemic and other emergencies aside, one of the most significant problems for companies like yours is that your clients don’t pay on time.
It’s such a common issue that, on average, a typical business has $84,000 in unpaid invoices. Obviously some of this is due to non-paying customers, but much of it has to do with how much time it takes the average invoice to be paid: typically about one to two months.
With invoices taking so long to be paid, and payroll coming every week, it’s no wonder so many businesses find themselves in a cash flow nightmare.
So, what can be done to resolve this dilemma? Believe it or not, there is a solution.
Ways to Finance Payroll
Payroll financing is one way you can bridge the cash flow gap that puts your cash flow at risk. There are many funding options, and several different payroll funding companies to choose from, but let’s start with some more typical ways a business can avoid cash flow issues.
Short Term Loan or Business Line of Credit
First thing’s first, if your company’s credit history is good, you can always take out a line of credit from a bank or even use a business credit card to get you through a tight cash flow issue.
The advantage of using a credit card is that you can often get the funds immediately depending on your credit card limit, whereas traditional bank loans can take several weeks to be approved. If you’re finding yourself with ongoing payroll issues, it might be wise to establish a line of credit that is large enough to get you through three to four cycles.
What is the drawback of using credit cards? The annual interest rates can be as high as 30%-40%, which can end up being a massive liability if not paid off in time.
At Your FundingTree, we offer a variety of business loans to get you through cash flow issues. Whether you need to keep up with paying your employees or to have enough cushion for economic downturns, we have a financing option that’s right for you.
One of the most innovative and helpful ways to cover overhead, such as paying your employees, is by financing invoices or accounts receivable.
Similar to invoice factoring, payroll financing is one of the most convenient, and inexpensive ways of paying your employees.
Here’s how it works. A payroll funding company gives you a loan based on your unpaid invoices or on your about to be billed invoices. It will generally advance you up to 90% of an invoiced amount, depending on the credit rating of the client who’s invoice you want to fund. Once an invoice has been funded, your client will pay the payroll funding company for their invoices instead of you, and you’ll have the majority of the funds so you can now cover your day-to-day expenses.
Once the payroll funding company gets paid by your client, you receive the remaining 10% less a 1%-3% interest rate (on average) and any other additional fees being deducted. You’ll often see the funds within a few days. Also, you won’t have to worry about expensive interest rates or collecting on outstanding invoices.
This method is standard when it comes to invoice factoring, and payroll funding works similarly.
The difference? Payroll funding companies often have a payroll services arm built-in to the financing, so you’ll likely want to let them manage your payroll. The result is a one-stop-shop that can handle all of your needs.
Save Time and Money
What is payroll? No one knows quite like the professionals at Your FundingTree. From payroll financing to payroll services, we understand what your business needs to stay afloat. Contact us today and see how easy it is to get started.