What payroll funding is, and why it works differently for a staffing agency

Payroll funding is money advanced against work your people have already performed but your customer has not yet paid for. The mechanics are unremarkable. The reason it exists as a named product is that in some businesses the gap between paying wages and collecting revenue is not an accident of one bad month — it is the permanent shape of the business.

The structural gap

Illustrative only. Suppose a staffing firm pays 100,000 of wages a week plus 12,000 of employer taxes and burden, so 112,000 leaves the account every Friday. Invoices go out weekly and customers pay on net 45 terms, in practice closer to fifty days from the work being done.

Fifty days is roughly seven weeks. Seven weeks of payroll at 112,000 is about 784,000 of your own cash standing between the work and the payment for it. That number is not a shortfall you can close by economising. It is the working capital the business requires to exist at its current size.

Now win a new contract that adds 112,000 a week. It needs another 784,000, and it needs it before the first invoice is paid. Growth in a labour business consumes cash at a rate set by your payment terms, which is why staffing firms with full order books run out of money.

How it works for a staffing agency

Payroll funding for staffing is normally receivables-based and built around the pay cycle:

1. Time is captured and approved at the end of the work week.
2. You submit timesheets and a schedule of accounts to the funder, often the same day.
3. The funder advances a percentage of the invoice value, typically before the invoice is even sent to your customer.
4. Payroll is funded and paid on your normal pay date.
5. The customer pays the funder or a lockbox on its usual terms, and the remainder is released to you less fees.

Whether this is structured as invoice factoring with a payroll service attached, or as a payroll-specific facility, the underlying collateral is the same: the receivable created by the hours worked.

How it works for everyone else

For a business that is not selling labour by the hour, "payroll funding" is usually a general working capital product being used for payroll: a line of credit, a receivables facility, or in the worst case a short-term advance. There is no special payroll product; there is a cash need with a hard date on it.

The distinction matters because a staffing firm's payroll gap is collateralised by definition — the wages you paid created an invoice on the same day. A restaurant's payroll gap is not. Lending against payroll where no receivable is created is lending against next week's revenue, which is a different risk and priced like one.

Payroll funding is a day-of-the-week problem

The most common failure in payroll funding is not credit. It is the calendar.

Money has to be in the payroll account before the file is transmitted, and the file goes out ahead of the pay date. Standard ACH credits are usually submitted one to two banking days before payday. Same-day ACH exists but runs to fixed submission windows during the banking day and carries a per-transaction limit set by the network rules — check the current figure rather than assuming. A wire settles the same day and costs more.

Work backwards for a Friday payday and a typical week looks like this:

• Sunday. Work week ends.
• Monday. Timesheets approved and submitted, schedule of accounts sent to the funder.
• Tuesday. Funder verifies and approves; any missing approvals get chased.
• Wednesday. Funds advanced; payroll file submitted.
• Friday. Employees paid.

That leaves roughly one business day of slack. Remove it with a bank holiday, a client whose manager approves timesheets on Wednesdays, or a funder cutoff at 11am rather than 3pm, and the run is late. Late payroll costs you workers, and in a staffing business the workers are the product.

Three things to establish in writing before you rely on any facility:

• The daily cutoff time for a funding request, and the time zone it is measured in.
• What the funder requires before it will release — signed timesheets, client approval, the invoice itself, or all three.
• What happens on a week containing a bank holiday, and who moves first.

Then map the whole year's pay dates against the banking calendar once, in January, and mark the weeks that need to run a day early.

What it costs, and how to read the price

Pricing may be quoted as a discount on the invoice for a period of days, as a percentage of gross payroll, or as a rate plus fees on a facility. Convert whichever you are given into two numbers: total annual cost, and cost as a share of your gross margin. In a business running on a spread between bill rate and pay rate, a fee that looks small against payroll can be a large fraction of what you actually keep.

Now apply a discount of 2.5 percent of invoice face value. That is 80 cents an hour, which is 10.9 percent of your gross profit. Across 2,500 hours a week it is 2,000 taken out of 18,400 of gross profit.

Read the same fee the other way and it looks small: 2.5 percent of face, on money outstanding for 45 days, annualises to roughly 20 percent. Both numbers are true. The one that decides whether the business works is the first, because 10.9 percent of the spread is what you actually give up, and it comes out of the same 7.36 that has to cover recruiters, insurance, back office and profit.

That is the calculation to run before accepting a new contract at a lower bill rate. A placement at a 15 percent margin does not survive a facility priced against face value.

What to settle before the first payroll runs through it

• The cutoff time and time zone, and what "received" means — sent, or acknowledged.
• Exactly what the funder requires before releasing: signed timesheets, client approval, the invoice itself, or all three.
• How a new client is credit-approved, and how long that takes, because the first payroll for a new account is the one most likely to be late.
• What happens on a week containing a bank holiday, in writing, with the funder naming the day it moves to.
• Who you call when something has not arrived by 2pm on a Wednesday, and who covers them.

Then map the whole year's pay dates against the banking calendar once, in January, and mark the weeks that have to run a day early. That exercise takes an hour and removes the single most common way a funded payroll still arrives late.