When payroll and invoicing cycles don’t match up, payroll funding can be the solution to ensure workers are paid on time.
Use this guide to understand what payroll funding is, how it works, and benefits and considerations
What Is Payroll Funding?
Payroll funding, also known as payroll financing or staffing funding, is a financial service where a company receives immediate cash to cover payroll expenses by using their outstanding invoices as collateral.
It’s commonly used by businesses that face cash flow gaps between paying employees and receiving payment from clients, such as staffing agencies or businesses with long payment cycles.
What Are The Benefits Of Payroll Funding?
Payroll funding provides a way for businesses—especially staffing agencies or companies with cash flow gaps—to finance their payroll obligations by leveraging outstanding invoices. Here’s a breakdown of its benefits:
Improved cash flow
Payroll funding provides immediate cash by advancing a percentage of your unpaid customer invoices—often up to 90%.
This is especially helpful for businesses that have to pay employees weekly but don’t get paid by clients for 30 to 60 days.
For example, a staffing agency can use payroll funding to cover wages while waiting for corporate clients to settle their invoices.
It eliminates the need to dip into savings or take out expensive short-term loans. This consistent cash flow keeps operations running smoothly.
Supports business growth
As your sales and invoice volume grow, your access to funding grows too—so you're not limited by your bank balance.
A construction subcontractor, for instance, can take on a larger project knowing they can fund payroll for extra crew through their unpaid invoices.
This scalability allows businesses to accept bigger contracts or add staff without upfront capital.
Because it's not a loan, there's no debt to repay—just a small fee deducted when the client pays. That makes it a flexible, low-risk way to support expansion.
Employee retention and satisfaction
Timely and reliable payroll is essential to keeping employees happy and reducing turnover.
Payroll funding helps ensure staff and contractors are paid on time, even when customers delay payment.
A seasonal business like an event staffing company, for example, can guarantee weekly pay during peak season without cash reserves.
When workers are paid without interruption, morale and loyalty improve. It also enhances your employer reputation, which is crucial in competitive labor markets.
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Operational flexibility
Unlike traditional bank loans, payroll funding is fast and flexible, with funds typically available within 24 hours of invoice submission.
Approval is based on your customers’ credit—not yours—which is ideal for newer or fast-growing businesses.
For instance, a tech consulting firm can meet payroll even during a client’s 60-day payment window.
There's no need for collateral or personal guarantees in most cases, providing agility for companies to respond quickly to new opportunities or unexpected costs.
Simplified back-office management
Many payroll funding providers also offer services like payroll processing, tax filing, and workers’ compensation coverage.
This all-in-one model can save time and reduce compliance risks. A light industrial staffing company, for example, might outsource both funding and payroll to avoid managing payroll taxes or labor law issues internally.
That means fewer headaches and less need for in-house administrative staff.
How Does Payroll Funding Work?
The payroll funding process is simple, here’s how it works:
1. You provide a service and issue an invoice
After completing work for a client (e.g., staffing a project or delivering a service), you send them an invoice with payment terms—often net 30, 45, or 60 days. This invoice is your asset, which you’ll use to access funding.
Example: A staffing agency places 10 temp workers for a week and issues a $15,000 invoice to the client with net 30 terms.
2. Submit the invoice to the payroll funding company
You send a copy of the invoice (and sometimes time sheets or proof of delivery) to the funding provider. They assess the invoice and your client’s creditworthiness—not yours.
Example: You email or upload the $15,000 invoice and timesheets to the funder’s portal.
3. Receive an advance (typically 80–90%)
The provider advances you a percentage of the invoice—commonly 80–90%—within 24 to 48 hours. This gives you immediate access to the funds needed for payroll.
Example: You receive $12,000 (80% of $15,000) to cover payroll and other expenses.
4. Your client pays the invoice (to the funder)
Your client pays the full invoice amount directly to the funding company according to the original payment terms. This is part of the agreement and often handled via a "Notice of Assignment."
Example: On day 30, your client pays the full $15,000 to the funder.
5. You receive the remaining balance (minus fees)
Once the invoice is paid in full, the funder sends you the remaining 10–20%, minus their fee (usually 1–5% depending on volume, risk, and terms).
Example: You get the remaining $3,000 minus a $450 fee (3%), so $2,550 is returned to you.
Payroll Funding: What To Watch Out For
While payroll funding can be a valuable tool for managing cash flow and ensuring timely payroll payments, there are several potential downsides businesses should consider:
Fees and cost structure can vary widely
While fees typically range from 1% to 5% of the invoice value, the pricing model may include hidden charges—like setup fees, monthly minimums, or penalties for early client payment.
Tip: Always ask for a clear breakdown of fees and make sure you understand the total cost, especially if your invoice is paid early or late.
You may need to assign invoice collection rights
Most funding companies require a Notice of Assignment, meaning your clients pay the funder directly.
This can be sensitive if you're worried about how clients perceive your relationship with a third-party funder.
Tip: Be transparent with clients about the arrangement, especially if it’s a long-term partnership.
You're responsible for client non-payment in most cases
Most payroll funding is recourse factoring, which means you are responsible if your client doesn't pay the invoice.
Some funders offer non-recourse options (they take on the risk), but these usually come with higher fees and stricter credit checks.
Tip: Work with funders who offer credit checks on your clients to help mitigate risk.
Your funding is tied to client creditworthiness
If a client has poor credit or a history of slow payments, the funder may reject the invoice or offer lower advance rates.
Tip: Make sure your clients are creditworthy, and check if your funding partner provides tools or reports to help you screen them.
Contract terms may lock you in
Some providers require multi-month or even year-long commitments, and breaking a contract early can trigger exit fees.
Tip: Read the fine print and look for flexibility—especially if you're new to payroll funding or expect your needs to change.
Back-office integration can help or hurt
Bundled services like payroll processing and compliance support can be a huge time-saver—but only if the provider is reliable and integrates well with your systems.
Tip: Test the funder’s tech platform, support responsiveness, and reporting features before committing.
Payroll Funding FAQs
This depends on the payroll funding supplier and the established relationship between the organization and the supplier.
Initial approval process
When a company first establishes a payroll funding relationship with a provider, there’s usually an onboarding process that includes a credit check, verification of financial statements, and other due diligence steps.
This initial approval can take anywhere from a few days to a couple of weeks.
Ongoing funding requests
Once the relationship is established, subsequent payroll funding requests are usually processed faster, but there’s still an approval period. This can range from a few hours to a full business day, depending on:
- The provider’s internal review process.
- The company’s financial standing and compliance with the terms of the agreement.
- The accuracy and completeness of the submitted request (e.g., payroll details, required documentation).
Same-day approval for regular clients
Many providers offer expedited approvals for companies with a strong history or a pre-approved credit facility. In these cases, the approval might be near-instant, especially if automated systems are used to verify the request.
Factors delaying approval
If there are any discrepancies in the payroll information, changes in the company’s financial status, or any issues with collateral (if required), the approval period can be extended while those issues are resolved.
Once a request has been approved
When a request has been approved, the speed at which it enters the organization’s account depends on the method of transfer and the time when the funding request is made. Here's a general breakdown of how fast money can be available:
- Same-day or next-day funding: Some payroll funding companies offer same-day or next-day access to funds, especially if the request is made early in the day. This is often possible when using automated clearing house (ACH) transfers or other electronic methods.
- Wire transfers: Wire transfers are typically faster, with funds sometimes being available on the same day the request is made. However, wire transfers can involve higher fees.
- ACH transfers: ACH transfers are usually processed within 1–3 business days.
- Cutoff times: Many providers have cutoff times for requests to be processed on the same day. If the request is made after the cutoff time, it might not be processed until the next business day.
- Bank processing time: Speed can also depend on the recipient bank’s processing time. Some banks might process funds faster than others.
Credit facility or line of credit: If you have a pre-established payroll funding arrangement with a credit facility, the funds might be made available instantly or very quickly, depending on the agreement.
Payroll funding can be utilized by a wide range of industries, especially those that rely on regular payroll cycles and may face cash flow challenges.
Here are some of the key industries that often use payroll funding:
Staffing and recruiting agencies
These businesses frequently pay employees on a weekly or bi-weekly basis, but may not receive payment from their clients for 30-90 days, so payroll funding helps them cover payroll costs while waiting for client payments.
Construction
Construction companies often have large projects with delayed payments from clients. Payroll funding helps them maintain cash flow to cover wages and materials while waiting for project milestones or payment cycles to be completed.
Healthcare (e.g., home health agencies, clinics)
Healthcare providers, especially those dealing with insurance reimbursements or Medicare/Medicaid, may face delayed payments.
Payroll funding allows them to meet payroll obligations for healthcare workers while waiting for claims to be processed.
Manufacturing
Manufacturers may have long production cycles, and customers may delay payments for large orders. Payroll funding bridges the gap between production and payment so manufacturers can pay their workers on time.
Hospitality and restaurants
These industries tend to have high employee turnover and a heavy reliance on part-time and hourly staff. Seasonal fluctuations in business and cash flow make payroll funding useful to ensure consistent wage payments.
Transportation and logistics
Companies in this sector may have long billing cycles and high operating expenses (fuel, vehicle maintenance, etc.). Payroll funding ensures they can pay drivers and staff while awaiting payment for completed deliveries.
Retail
Retailers often deal with variable sales cycles, and during slower seasons, they may need payroll funding to keep up with payroll expenses while waiting for revenue to pick up.
Agriculture
Farming and agricultural businesses may have seasonal revenue, often relying on harvest times or contract payments. Payroll funding helps maintain cash flow during the off-season or while waiting for payments from large contracts.
Professional services (e.g., IT, consulting, legal firms)
These firms may work on projects with extended billing cycles or wait for retainers from clients. Payroll funding allows them to cover salaries for consultants or professionals while awaiting client payments.
Nonprofits
Nonprofits often rely on grants and donations, which may come in sporadically. Payroll funding helps maintain a steady payroll for staff while waiting for funding to arrive.
Oil and gas
This capital-intensive industry often deals with long project timelines and delayed payments. Payroll funding helps oil and gas companies cover payroll for field workers, engineers, and other staff while waiting for project revenue.
Wholesale and distribution
These businesses typically buy goods upfront and may face delayed payments from customers. Payroll funding provides the liquidity to cover payroll during these periods.
Entertainment and events
Production companies, event planners, and entertainment firms often need to pay temporary workers and vendors while waiting for payment from clients, sponsors, or ticket sales. Payroll funding helps them bridge this gap.
Education and childcare
Schools, daycare centers, and other educational institutions may face delays in receiving tuition payments or government subsidies. Payroll funding helps cover payroll expenses for teachers and staff.
Yes, many payroll funding companies do integrate with payroll software or payroll software for small businesses to streamline the payroll process and make it more efficient.
These integrations provide several benefits for businesses, including automated data sharing, reducing manual input, and improving accuracy in payroll management.
Key benefits of payroll funding and software integration:
- Seamless data transfer:
- Payroll funding companies can directly pull payroll data from the business’s payroll software, ensuring accurate calculations of wages and the amount of funding needed.
- Automated payroll processing:
- With integration, payroll software can automatically calculate and submit payroll to the funding provider, reducing manual work and speeding up the funding approval process.
- Real-time reporting:
- Businesses can track real-time earnings and deductions reports, available funds, and funding requests through the integrated platform, allowing for better cash flow management.
- Reduced errors:
- Automation reduces the chance of human error in calculating payroll or submitting data for funding, ensuring smoother operations and compliance.
- Invoicing and receivables management:
- For businesses that use payroll funding tied to accounts receivable (factoring), integrations with accounting or payroll + invoicing software can help sync client payments with payroll needs, improving coordination between invoicing and payroll cycles.
- Faster funding approvals:
- Integrations can help payroll funding companies quickly assess the payroll needs and approve funds faster, as they can instantly verify payroll amounts and other key metrics.
- Simplified compliance and tax filing:
- Integrated systems often include tools for managing tax obligations and ensuring compliance with payroll regulations, further reducing the administrative burden on the business.
Popular payroll software that may offer integration with payroll funding:
In addition to specialized payroll software, many payroll funding companies integrate with other HR software solutions and HR software for small businesses such as an HR information system or an HRMS.
The key differences between payroll advance and payroll financing lie in how they function and who benefits from each:
1. Payroll advance
- Who it’s for: Employees.
- How it works: A payroll advance allows an employee to receive a portion of their upcoming paycheck before the scheduled payday. This is usually facilitated by the employer or through third-party services.
- Repayment: The advance is deducted from the employee’s future paycheck, essentially making it a way to access their earned wages earlier.
- Purpose: Helps employees manage short-term cash flow issues between pay periods.
- Costs: May involve minimal fees depending on the employer or service provider.
2. Payroll financing
- Who it’s for: Businesses.
- How it works: Payroll financing allows a business to obtain external funding to cover payroll expenses. This is often used when the business faces cash flow challenges, such as delayed client payments or project-based revenue cycles.
- Repayment: The business repays the financing provider, usually when it receives payment from its clients or other revenue streams.
- Purpose: Ensures that businesses can meet payroll obligations without disrupting operations or waiting for incoming payments.
- Costs: Typically involves fees or interest rates, similar to other forms of business financing, though often more flexible than traditional loans.
Summary:
Payroll Advance is for employees needing early access to wages, while Payroll Financing is for businesses that need short-term funding to meet payroll obligations.
A payroll loan is a short-term loan specifically designed to help businesses cover payroll expenses when they’re facing cash flow issues.
It provides businesses with immediate access to funds needed to pay employees on time, even if the business is waiting for payments from clients or is dealing with seasonal revenue fluctuations.
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