Payroll Funding

How does payroll funding work?

Payroll runs on a fixed schedule, weekly, every two weeks, or twice a month, regardless of when your customers actually pay their invoices. For labor-heavy businesses, especially staffing, security, and services companies, payroll can outpace cash flow fast as you scale headcount to meet a new contract or busy season. Payroll funding draws against work you've already performed, even before it's fully invoiced, so you can cover payroll on time while you wait to bill and retain the people doing the work.

Payroll is the least forgiving liability a services business carries. Materials can sometimes wait and vendors can sometimes be negotiated, but a missed pay cycle costs you the people performing the work, and on a services contract, that workforce is the deliverable. Replacing trained or credentialed staff mid-engagement is far more expensive than financing the gap would have been.

The mismatch is structural, not a sign the business is underperforming. A company that wins a bigger contract staffs up immediately and bills in arrears, so the fastest-growing companies often feel the squeeze hardest. Funding drawn against earned but unbilled revenue closes that gap without diluting ownership. Our guide to how billing cycles create a cash-flow gap shows why it opens up.

Availability is a formula against the revenue you have earned. The starting point is how much work has been performed but not yet billed, along with your pay frequency and how many pay cycles typically run before a given period of work gets invoiced and paid. Availability is usually capped at 85% of earned but unbilled revenue. A company on a biweekly payroll billing monthly in arrears is carrying a materially different gap than one invoicing weekly, and the facility reflects the real number, not a round one.

As your invoicing catches up and receivables come in, draws against this facility are repaid, and the capacity you have repaid becomes available again, within your approved limit. Many companies use payroll funding as a bridge during a specific growth period, a new contract ramp or a seasonal headcount increase, and scale back their draws once billing catches up with payroll, rather than carrying the facility at full use indefinitely.

Things to know before you apply.

• A draw within the 85% cap can cover whatever it takes to perform the work, including wages, employer taxes, workers' compensation, and benefits.
• It applies to work already performed, so it complements invoice factoring, which can take over once the invoice is sent, with the earlier payroll advance settled under your agreed structure.
• Many staffing firms use payroll funding first and factoring after billing.

Further reading.

• IRS: Employment taxesEmployer payroll taxes are a large part of the fully loaded cost of every paycheck.