Financial credit is vital to the operation of any business. Any vendor who does not say “cash on demand” (or COD) on their invoices is essentially providing credit. If all delivery and credit terms were synchronized, credit and remittance would work hand in glove. However, the entire supply chain does not operate on the same schedule of delivery and payment. As a result, payment out no longer keeps time with the remittance of goods and services.
Enter Collateralized Credit
For most business models, there are three distinct credit platforms.
Forward Funding – A capitalization loan of a single amount requiring repayment over time (SBA 7A and SBA 504 Loans).
ABL Loan - A bank issued revolving line of credit.
Factoring – Also known as Invoice Funding.
While most small businesses fail to qualify the first or second type, they can often procure a factoring services as a means to access funding through their invoices.
Factoring (“The Factor”) appreciates the good business practices of its client, but it relies on the creditworthiness of the client’s customer. The protocol is such that the Factor advances to its client 75% - 90% of client invoices outstanding. Upon customer payment, the factor is paid back the advance, takes a fee of 2.5% +/-, and sends the balance of the invoice payment to the client. Accordingly, the Factor acts as if it the client’s financial partner – however the Factor only requires a preference and NO equity.
A factoring relationship benefits the growing business, it also aids those businesses without significant capital. The client receives payment upon invoice which is usually sufficient to satisfy its cost of goods sold and a percentage of operations. The timely factoring advance becomes the needed equity to satisfy client obligations between invoice and customer payment. Potentially, the best feature inherent in factoring is the timing of repayment. No interest payments are required until the customer remits. However, with factoring costs of 2% to 3%, attainable net profits for service delivery would likely need to be north of 10%. Not all service-based businesses operate with this level of profit for services provided.
The Big Break in the "Net 30" Business Rhythm: Payroll
Net 30 is a standard in the business world. Most businesses extend net 30 credit to their customers and receive the same credit from their vendors and material suppliers. Net 30 is the good faith drum beat virtually all business live by. However, there is one exception to this rhythm – payroll. Payroll demands payment on time every time, it does not negotiate, it does not give terms. Virtually every applicant for factoring counts payroll as its number one concern. All other debts can be negotiated to create workable terms, but not weekly or bi-weekly payroll deadlines.
Payroll Friday was built to fund payroll for its service-based business clients. Jjust payroll. Payroll Friday takes the best features inherent in factoring and molds them into a revolving line of credit utilizing the client’s good invoices for collateral. Additionally, Payroll Friday becomes its clients’ accounts receivable manager. Very simply, if there are good invoices being created Payroll Friday makes payroll. As customer payments arrive, the payroll account is reconciled to zero, and balances are transferred to the clients’ operating account so that employees can be paid.
For a Payroll Friday client, typically, payroll constitutes less than 65% of gross sales. Additionally, the frequency and quantity of customer payments covers payroll credit quickly. For these two reasons, Payroll Friday costs the client significantly less than factoring. In most cases the cost is 0.5% to 1.0% of gross sales. As mentioned, this small fee also replaces the need for accounts receivable management on staff, so in essence, Payroll Friday does two things for this small, 0.5% to 1% fee of gross invoices:
Provides cash on hand consistency to ensure payroll obligations are met.
Provides Accounts Receivable management for the client business.
Payroll Friday works like a revolving line of credit, at a cost far less than factoring. Once implemented, clients using Payroll Friday never have to worry over payroll again.