Payroll Factoring & Funding Service | Business Factors
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Payroll Factoring

Payroll factoring is a quick way to convert outstanding receivables into cash to pay employees. Invoices are sold to a third party, known as a factoring company or, simply, factor. Factoring offers the following benefits:
  • Eliminates the long wait time for the receivables to get paid
  • Increases a business’s cash flow through the immediate transfer of working capital
  • Reduces the need for back-office staff

What is payroll factoring?

Making payroll on time is essential for any business. However, If a company’s clients have long net terms, for example, the company may struggle to maintain positive cash flow even if it is profitable. A solution to this is payroll factoring.

Payroll factoring allows you to sell outstanding invoices at a discount to a third-party company, known as a factoring company or, simply, a factor. The proceeds can then be used to pay employees.

The factoring company assumes the responsibility of collecting payments from your customers – either on a permanent or temporary basis – and keeps a small percentage of the total invoice amount as their fee. A factoring company can buy just a few of your invoices, known as spot factoring, or all of them, known as whole ledger or full-turn factoring. To learn about the cost of factoring, please visit our Small Business Factoring page or the Frequently Asked Questions page.

Other types of payroll finance are asset-based or working capital loans. Contact Business Factors today to find the best payroll funding arrangement.

How does payroll factoring work?

A company can factor invoices in four simple steps:

  • The business provides a factor with a copy of the invoice that was sent to the client (account debtor)
  • The factor verifies the invoice and runs a credit check on the account debtor
  • The factor advances a portion of the outstanding amount
  • Once the invoice is paid, the business gets the remainder minus the discount rate and any additional fees

Why should you use it?

Here are some advantages of payroll factoring:

  • Gives businesses working capital in 24 to 48 hours without taking out a loan or opening a line of credit.
  • Eliminates the wait time associated with collecting payment from customers in exchange for a small fee
  • Factoring companies can take over accounts receivable management for the invoices they’ve factored, eliminating or reducing the need for back office staff.
  • With a positive cash flow, businesses can use the money to not only pay employees on time but also grow the enterprise, look for new clients, purchase new assets or offer more competitive salaries to their employees.

Types of payroll factoring

Two types of payroll factoring are available depending on the needs of your business:

  1. No-service factoring. Here, the factor only purchases your invoice(s). Your company retains the responsibility of performing subsequent tasks, such as processing the cash, filing it, directing it toward employee salaries, etc. This option is good for businesses that need a payroll funding solution but not comprehensive business support.
  2. Full-service payroll factoring. This option gives the factoring company additional responsibilities such as processing paychecks, filing tax returns, and other business tasks in addition to turning unpaid invoices into cash. Here, your business processes are outsourced to the factoring company. Business Factors offers full-service factoring saving – including complimentary credit checks on your clients – saving your business time and money.

Payroll factoring is a quick way to convert outstanding receivables into cash to pay employees. Invoices are sold to a third party, known as a factoring company or, simply, factor. It eliminates the wait time associated with collecting payment from customers in exchange for a small fee.”

Case study: telecom company in need of cash

Let’s take a look at a case involving a telecom company that successfully used payroll factoring.

The company urgently needed capital to pay its employees. It was experiencing cash flow problems because its main client – the government – was behind on paying the company for the work already completed.

After turning to payroll factoring, the company was able to monetize a $10,000 invoice and use the funds to meet payroll and fund other working capital expenses. The move allowed the company to keep its best talent and avoid labor complaints. Here is the exact arrangement used by this client. Please note that the cost of factoring varies across the industry. To get a quote, please contact us.

  • Invoice amount: $10,000
  • Advance rate: 85%, or $8,500
  • Reserve: $1,500, or 15%
  • Discount rate: 2.19% per month until the invoice is collected; fee capped at the reserve amount
  • Type of arrangement: non-recourse

In this case, the invoice was collected in two months meaning that the client paid $438 to monetize the invoice and eliminate the wait for the much-needed working capital. Once the payment was made, the remainder of the reserve ($1,062) was refunded to the client. The arrangement was non-recourse meaning that there would have been no chargeback to the telecom company if the invoice had not been paid. To learn more telecom financing, please visit our Telecom Finance, Wi-Fi and Cable Financing page.


Payroll factoring can be an attractive option for companies that need cash to pay employees or fund business operations. By selling invoices to a factoring company at a discount, businesses can immediately get cash without incurring debt.

While business loans may take a considerable amount of time to be approved, payroll factoring can provide funds in as little as 24 to 48 hours. It allows a business to outsource their entire accounts receivable department through full-service factoring so that the third-party assumes the responsibility of collecting payments from customers. No-service payroll factoring only provides funds without any additional services. Contact Business Factors today to get started. We have been in business for close to 20 years providing factoring, asset-based lending and other working capital services to small businesses in the U.S. and Canada. Contact us today to obtain working capital for your business or get a factoring quote.

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