Payroll is a huge drain on cashflow. Whether you employ five people or five hundred, they have to be paid every month, regardless of the other financial issues facing the business.
And if you’re drumming your fingers waiting for payment on a major contract or facing the prospect of spending heavily on new equipment, you know that somehow the wages also have to be paid.
There are various ways to address this problem, ranging from invoice discounting and factoring (enabling you to borrow against cash due from customers) through to the good old fashioned overdraft. But it is also possible to arrange a specific payroll finance facility to free up cash.
What is payroll finance?
Put simply, payroll finance providers advance you cash equivalent to the amount you need to pay wages, tax and national insurance over a specified number of months, usually two. So if your monthly wage bill is £100,000 and you arrange a payroll finance facility based on two months worth of payments, the lender will allow you to borrow up to £200,000. The money that you would have spent on wages can then be retained as cash and spent as you see fit, with you repaying the loan, plus interest over an agreed timescale.
Pros and cons
Payroll finance is unsecured and can be used in tandem with other borrowing facilities. You will be entering into a rolling agreement where the credit is available as and when you need it. Thus, it is available as a safety net to provide finance when cashflow problems threaten to arise. If you don’t need to borrow, you don’t have to use the facility.
On the downside, you will pay interest and fees, themselves a drain on cashflow. To take an example, one specialist provider charges interest rates at 3.0% above base, plus a monthly charge of £250 to £350. And while payroll finance is flexible – in the sense that it can be used as a safety net – lenders may insist that you must borrow a minimum amount.
What next
To qualify for payroll finance, you will have to meet lenders’ criteria on turnover, trading record and your existing credit limit. For more information contact specialist providers, such as Wageroller, Smartflow Finance, Sterling Capital Reserve (which uses Wageroller), Lion Finance (which uses Smartflow) or XLBusiness Finance. It’s also worth talking to your business banker or corporate finance adviser.
