What are the Differences Between Payroll Funding Companies and Invoice Factoring Firms?

When a bank loan is an unobtainable financing option for a small business owner, he/she starts investigating alternative funding solutions. Two of the more frequently used alternative financing options are payroll funding and/or invoice factoring.

Payroll Funding Invoice FactoringAt first glance, the two options may appear to be the same thing. Truth be told, there are many similarities between the two, but there are some core differences as well.

It’s a cash flow consultant’s job to be able to easily distinguish between the two. This article will help you identify the differences so you can better be able to advise your clients on which would be a better fit for their cash flow needs.

Payroll Funding & Invoice Factoring Similarities

Quick approval process – Most accounts can be set up within 3-5 business days.

Immediate access to cash – Both can advance funds on invoices within hours of verification.

Fast credit decisions – Both can approve new debtors within days.

Reduce overhead costs – Both types of funding companies can help business owners stay on top of sending out invoices on time as well as collecting on past due invoices.

Works for companies of any size in any industry – Startups, expanding companies and established corporations can all benefit from either funding option.

PRN Healthcare Factoring

Payroll Funding & Invoice Factoring Differences

The main difference between the two funding choices is how many services a business owner needs in addition to funding. In a nutshell, invoice factoring companies offer financing only, whereas payroll funding companies offer financing plus payroll processing services.

Typical Invoice Factoring Process

1. Client performs services, and issues an invoice to their customer.

2. Factoring company verifies services were completed.

3. Factoring company purchases the invoice and advances a portion of the invoice’s value upfront to the client.

4. The client uses the immediate working capital to cover their payroll and payroll taxes and meet other business financial obligations.

5. Factoring company receives payment on the invoice from the client’s customer

6. Factoring company takes a fee and releases the difference back to the client.

Moreover, the payroll funding process involves multiple steps because it includes more than just financing.

Typical Payroll Funding Process

1. Client sends time-sheet information to payroll funding company (usually through a designated online system).

2. Payroll funding company completes the following back-end services:

  • Sends the client weekly profits, management reports and weekly paychecks.
  • Issues payroll to the clients’ employees on a weekly basis.
  • Submits and files payroll taxes to appropriate federal and state agencies.
  • Generates and sends out invoices to the client’s customers.

3. The client’s customers pay the payroll funding company directly for the client’s services.

4. Payroll funding company takes a fee and releases the difference back to the client.

So there you have it—A handy reference guide explaining the differences and similarities between invoice factoring and payroll funding. It all boils down to whether or not your prospect needs additional services on top of financing.

So the next time you have a prospect on the line, make sure you listen to their needs. If they’re looking for a one-stop shop that can both finance and take over a lot of overhead, then payroll funding is probably the better fit. If, on the other hand, the business owner is only looking for additional working capital, then you know a factoring firm would be their best fit.

Phil Cohen PRN FundingPhilip Cohen is the founder and president of PRN Funding, LLC, which is an extraordinarily focused niche player in the healthcare funding market place.

Through a process known as factoring, PRN Funding provides business owners who sell to medical providers with the financial resources needed to grow and effectively compete in the industry. With no minimums or fixed terms, PRN Funding provides staffing companies with flexible and immediate access to capital.

Comments

  1. Small business owners know that securing a traditional bank loan is extremely difficult in today’s market. As this article points out, there are alternative financing options available to these small businesses. Payroll funding and invoice factoring are great options – but they might not be the right fit for every company. At The Receivables Exchange, we finance invoices without the restrictive contracts, hidden fees, or personal guarantees that are the norm of many alternative financing options.

  2. Cudos!

    Mr. Cohen for providing a clear and concise breakdown of the services and benefits of offering Payroll financing. It’s a valuable service that can be extremely beneficial to many emerging businesses growing rapidly. I certainly look forward to referring my expanding database of clients.

    Continued Success Mr. Cohen.

    BTW… Mariah not cool. Your firm offers a distinct and different service which is attractive to many. However, stealing the thunder from a fellow industry competitor is a bit classless.

    It would be great if you sponsored this site so your firms information could be shared just as well.

    Just my two cents. To Your Funding Success!

    Edward E. Felder, Jr. MBA

    ” The Funding Guy”

  3. Your article easily help me to figure out the difference between payroll funding and invoice factoring. Your article is very comprehensive.

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