Guide to the Basics of Payroll Finance

Management of a payroll is no mean business. No matter whether you have ten people on your rolls or ten thousand, you need to pay them at the end of the month, even if you face financial constraints. Payroll does make a huge impact on cash flow.

Payment is likely to be on your mind even when you are looking to implement your expansion plans or thinking of purchasing new equipment. There are ways in which you can address these issues, factoring, overdraft and invoice discounting being some of them.

Payroll financing works in a way that the cash you need for the payment of wages, national and tax insurance for a specific period of time, say a month or two, is paid in advance by the financers. For example, if your payroll expenses run to £200,000 for a month, then the cash needed for a couple of months is £400,000. The financier will lend you the sum and you can retain the cash that you had set aside for the wages. You can pay back the financier the principal amount along with the interest within the stipulated period.

Payroll finance services can be used like any other lending service. You will become a party to a rolling agreement, where you can obtain the money as and when you need it. It acts as a kind of safety net when there is a possibility of a financial crunch threatening your business. If you look at it the other way round, you will have to pay the cash back in the form of monthly repayment and interest, thus ebbing your cash flow any way.

Businesses need to meet certain criteria set by the financers in order to be eligible for payroll finances. These may include their existing credit limit, financial background, trading records and annual turnover.