Can Factoring Help You Pay Employees On Time?Posted by Factor Funding Co. on August 27, 2015
Have you ever faced a time when making payroll was difficult? That is a common occurrence in many small businesses. Cash is not flowing as expected. Transportation costs are rising faster than expected. Too much money is tied up in inventory. There are tons of accounts receivable pending. There is just not enough cash to pay the employees.
Factoring is one way to make payroll when money is tight.
Paying Employees is Not Optional
It is very easy to slip into the thinking that paying employees is much like paying any other bill. You can fudge a few days and pay a late fee with a utility or vendor bill. Paying your employees a few days later wouldn't be so bad, would it? It doesn't quite work that way.
By state and federal law, you are legally obligated to pay your employees the wages they are due, when they are due. If you don't pay your employees their full wages, on time, they have the right to file a wage claim against your company with the state's Labor Department. If the wage claim is upheld, you will be required to pay the employee's wages in full, with interest. You may also be assessed fines. Even if things are settled and you don't get hit with penalties, you are still on the radar of the state's Labor Department. And that is not good news for any company.
Another thing to think about. If you don't pay your employees, you may not be paying your payroll taxes either. And that means trouble with the IRS and state revenue department. Those are two entities you do not want to have on your back.
Another reason why paying employees is so important is that, when you miss a payday, your employees will think the business is in deep trouble. Even if it is only a temporary setback as far as cash flows, and everything else is healthy, not paying the employees is seen as a death knell. Employees will start looking for other work. Some will jump ship immediately, while others will wait until they have another job.
The end result is that you will lose valuable employees. You will need to hire and train new workers to take their places. Finding good workers to come into a company that has failed to pay employees in the past is difficult. You may find the quality of workers available is lower than you would like. That is not good for any business.
How to Meet Payroll with Factoring
Factoring is a viable option for raising the funds to meet payroll. You can free up a portion of the funds in your accounts receivable so that you can pay your employees on time. The best part is that it can happen within a matter of days.
If you have never factored your accounts receivable before, you will have to go through an application process with the factoring company, which usually takes a few days to complete. The factoring company will want to verify you have been in business for awhile and that your accounts receivable are with creditworthy customers.
When you already have a relationship established with a factoring company, funding can happen within 48 hours. You send the invoices to the factoring company, which reviews and verifies the accounts are good. Then, you receive a percentage of the invoices' value as upfront cash. You can use that cash to meet your payroll obligations. When your customers pay the invoices, you receive the rest of the money, minus a fee for the factoring company.
Don't let cash flow problems interfere with paying your employees. It is not worth the employee angst and potential legal troubles. Use accounts receivable factoring to raise the cash you need quickly.