Payroll loans vs payroll factoring

In almost any type of business, salaries can be a big part of the budget. Smaller and newer businesses can be especially cash-flow-challenged when it’s time to make payroll each month if they have to wait 30, 60, or even 90 days for their customers to pay them. Instead of worrying about your payroll responsibilities, you do have alternatives. Payroll loans and payroll factoring are two of these options.

While payroll loans and payroll factoring sound like similar solutions, they are very different. Which one you choose can have a major impact on how your company manages expenses well into the future. Here’s a quick breakdown of the two different types of advances you could receive so that you can decide which one will work for your company.

Payroll Loans: A Brief Overview

Payroll loans are offered by small business loan lenders or other alternative lending institutions. The annualized interest rates on these loans are usually in the region of 20 to 30%. The loan can be deposited into your company’s bank account a day or so after application. The agreement between you and the payroll lending service will usually stipulate that you need to repay the money on a predetermined date.

If you are unable to repay the money, the payroll lending company will take whatever steps necessary, up to and including debiting the money from your bank account or credit card, to collect the payroll loan, plus any additional fees or penalties. Some payroll lending services also significantly increase their interest rates for loans that are not repaid on time.

When is a Payroll Loan a Good Idea?

payroll factoring

If your business is experiencing a one-time cash flow problem, then a payroll loan might be one answer. However, payroll loans become expensive for ongoing potential cash flow problems. The strict repayment terms, coupled with high interest rates, could add to financial worries, making payroll loans a risky funding option for small businesses.

What is Payroll Factoring?

Payroll factoring isn’t a loan, so your business won’t be incurring any additional lines of debt when you partner with a factoring company. Instead, your company will sell its outstanding invoices to a factoring company, which will advance you a large portion of the invoice total right away. The factoring company will collect the invoice amount from your clients on your behalf. Once your clients have paid, the rest of the money (minus a small factoring fee) will be paid to you.

How can Payroll Factoring Benefit your Business?

One of the benefits of payroll factoring, besides turning over your chore of collecting from clients to the factoring company’s collections specialists, is that you are NOT borrowing money. You are not taking on a debt that must be repaid on a certain date. You are simply receiving payment early on work that you have completed. Factoring is a low-risk way to ensure that your business has enough cash to meet payroll expenses each month without adding any more debt to your business. Payroll factoring also ensures that the amount of money you have available is in line with the money you are expecting to receive from clients, so your funding grows along with your sales.

Since 1993, more than 10,000 companies have chosen Interstate Capital to help them build a stable cash flow so that they can meet their payroll obligations and other business expenses. Contact the factoring professionals at Interstate Capital!

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