What is Payroll Funding?

Updated in July 2023

Payroll Financing: What It Is and How It Supports Your Business

Contingent labour workers play a crucial role in the economy. We’ve seen in recent years how important it is for various sectors to have access to a skilled, talented and flexible workforce — whether that be travel, technology or healthcare.

This invariably translates into business: according to the Staffing Industry Analysts (SIA)’s March 2022 report, in the UK, annual sales revenue in the recruitment and staffing sector was up by a staggering 80% for contract placements. Given the size of this opportunity, it’s important for recruiters to ensure that they have the right systems in place to support this flexible workforce, particularly when it comes to receiving their payments in full and on time.

In payroll, consistency and compliance are key. It’s not possible to fulfil your duties without a steady cash flow. So, as a business, how can you deliver wages to your contractors when you’re expected to wait up to 90 days to collect invoice payments from your clients? The answer lies with payroll financing.

What Is Payroll Financing?

Payroll financing, also known as payroll funding, is a form of financing that allows organisations to release capital from their unpaid invoices and pay their workers on time. 

More often than not, businesses collect payments across longer intervals than payroll is issued, which causes sizable cash flow discrepancies. As a matter of fact, Sonovate’s research shows that over 37% of medium-sized businesses (SMBs) say it takes them 90 days on average to pay contractors. However, most permanent staff in the UK getting paid a monthly salary. 28% of SMBs believe this is due to cash flow issues.

Payroll financing involves selling your unpaid invoices to a third party in exchange for an advance on your revenue, which helps facilitate a reliable cash flow and supports a sustainable level of growth. Unlike traditional forms of financing, a payroll funding company can approve the process in a matter of 24 hours to give you quick access to the funds that you require.

Here are the other main components of a payroll funding facility:

• Credit control: Chasing up customer invoices for timely payments. 
• Invoicing: Invoices can be sent to customers based on the timesheets submitted by your contractors.
• Factoring: Collect money from your unpaid invoices before customers finalise their payments.
• Bad debt protection: Credit insurance protects you against the risk of customers going into liquidation.

Benefits of Payroll Financing

This type of invoice factoring presents businesses with many opportunities. Here are the key advantages of payroll funding:

• Punctual Payments

With no customer deposits needed, paying bills becomes less of a constant juggling act. Invoice financing lets you improve cash flow by finalising your employee payments and unpaid invoices, saving you money in the long run.

• Frees Up Time

A payroll finance company can offer services that eliminate the burden of administration and handle your accounts receivable collection process to save you valuable time. This streamlines your invoicing so you can focus on achieving company targets.

• Enhances Financial Stability

Payroll funding allows you to mitigate the risk of negative cash flow due to slow-paying customers and gain access to working capital that offers better financial stability for your business.

• Enables Business Growth

Payroll financing gives you the money needed to accept new contracts and expand your business. Paying invoices on time also reduces interest and boosts employee satisfaction, so you can build funds toward business goals.

Payroll Funding For Recruitment Agencies and Consultancies

Payroll funding for any staffing agency is essential, as the recruitment sector can often deal with significant cash flow issues. This boils down to late-paying clients, seasonal demands or rapid periods of growth. Recruitment agencies are responsible for paying temporary staff from their pocket whilst managing their expenses and attracting new business – all at the same time. Payroll financing solves this cash flow problem by providing a staffing company with the funds necessary to pay employees.

For start-up staffing companies, payroll funding is even more useful, as smaller businesses may not have the resources to constantly follow up with customers for their payments. Invoice finance companies such as Sonovate can take over this burden and ensure debts are paid on time.

How Payroll Financing Improves Cash Flow

If your clients require payment terms of up to 30, 60 or even 90 days, you could wait up to three months to receive outstanding payments, whereas you’ll need to settle your contractors’ payroll much sooner. Given these circumstances, many agencies are confronted with late payments and substantial gaps in their cash flow, which limits their ability to place more candidates or invest in growing their business.

Thanks to payroll funding, you won’t need to sacrifice working capital that could be used to finance projects and take on new lucrative opportunities. By streamlining and optimising your revenue, having a payroll financing service provider, allows you to cover your expenses and boost cash flow.

How Do Small Businesses Finance Payroll?

If you’re a small business, payroll finance will likely resemble invoice factoring, in which you’ll rely on credit control services. This saves you from investing in an in-house team, but it also comes at the risk of reputation damage. Some clients may not like that your company utilises the services of a finance facility. However, choosing the CHOCC (Client Handles Own Credit Control) option can help you address that concern for your client.

Payroll Financing Costs

To understand the rough costs for payroll financing, here’s an example:

Payroll financing companies charge service fees on every invoice, often 2.5% of the total cost, which, for a £1000 invoice would amount to £25. This creates £975 to advance against, giving you cash to add to your spending budgets before customer payments are made.

Optional: Bad debt protection (BDP) is sometimes included or can be added to your financing facility, and there could be costs associated with it.  

Sonovate’s Streamlined Solutions

So, how does candidate payroll funding for staffing agencies work? Whereas most funders offer 80%, Sonovate customers can raise money for up to 100% of the value of their invoices to accelerate cash flow and plug the gaps between paying contingent labour and receiving payments. We also offer 95% Bad-Debt Protection as standard to give you peace of mind. 

This is achieved through our industry-leading technology platform with a selection of solutions as well as comprehensive support from our team of experts. Depending on which Sonovate option you select, we’ll pay you on the same day, the following day or on a weekly basis. We’ll then await your clients’ payments while you make the most of your cash. Our state of the art platform offers transparent pricing, where you will know exactly how much you’re charged against each invoice. Those rates depend on your clients credit worthiness, the countries you’d like payments to be made to and other such factors. 

PAYE services

To support our customers even further, particularly smaller agencies who may not have the qualified resources to manage contractor PAYE, we have in-house specialists to do just that. Our certified team is up-to-date on the latest regulations, and our systems allow you to oversee the process digitally, from timesheets to payments and payslips.