No matter what industry you’re in, making payroll is at the top of the priority list for many business owners. Most employees won’t work for very long if they aren’t getting paid. If your staff walks out the door, your ship is sunk. Because of this, many businesses have some form of payroll financing in place to make sure cash is always available to take care of payroll.

A recent study by TD Bank found that the top stress factor for small business owners is managing their finances. Stress over how to make payroll is no doubt a big contributor to that! When cash is tight, running your business is like one of those plate-spinning acts. You’re doing everything to keep the plates spinning so that everything doesn’t come crashing down.

You have to pay your supplier for that order next week, but payroll is due on Friday and you don’t have enough cash to do both. What do you do?

Improving The Cash Flow Of Your Business

Payroll financing may be your primary concern, but it is only a symptom of the real problem. The real problem is insufficient cash flow.

There are two things that cause poor cash flow:

1)   Net Losses – Cash flow is simply cash coming in minus cash going out. If your business is running on losses, there’s a good chance that your cash outflows are greater than your cash inflows. While it’s very possible to have positive cash flow while you’re turning a loss on paper, it’s not common in a small business. Most small businesses don’t have a large amount of non-cash expenses. A loss on your P&L probably means the balance of your bank account went down that month.

2)   An Extended Cash Flow Cycle – Conversely, you may be very profitable on paper but struggle with cash flow due to a long cash flow cycle. This is especially common in product-based businesses. You have to purchase your raw materials, manufacture the product, sell the product, invoice and then collect. Your cash flow cycle begins the day you pay for the raw materials and ends the day you collect on the invoice. The longer this period is, the longer that cash is tied up.

Eliminating net losses and reducing your cash flow cycle provides more cash to be used for things like making payroll.

Consider Other Business Funding Options

Sometimes there isn’t much to do to improve cash flow internally. That’s where various forms of business funding come into play. Business financing bridges the gap between the cash outflows and inflows of your business.

If you’re primarily concerned about payroll financing, your best options are a working capital loan, factoring or merchant advances.

1)   Working Capital Loan – This type of loan is typically a revolving credit facility wherein funding is based on your accounts receivable and/or inventory. These facilities are usually geared towards product-based businesses.

2)   Factoring – In this arrangement, the factor purchases your invoices at a discount. You get cash up front and your customers pay the factor. When an invoice is paid, you get the remainder of the invoice less the fee charged by the factor. Factoring is done with product or service-based businesses across practically any industry.

3)   Merchant Advances – This type of financing allows you to take an advance against your future credit card payments. The finance company then takes a percentage of your future credit card receipts to repay the advance. Merchant advances are typically limited to restaurant, retail and service companies with strong credit card sales.

Meeting payroll is a concern for any business owner. Start by looking internally to see if there are ways to improve cash flow. If the issue isn’t solved internally, consider the various financing options available. Then you will finally sleep well at night knowing that the funds are there to take care of your employees and their families.

Fast A/R Funding specializes in helping small businesses bridge the cash flow gap with factoring. Download our informative “Factoring 101” guide, or call 888.833.2286 to speak with one of our small business finance consultants.