Payroll Funding

Is payroll funding right for your contract?

Payroll is the least forgiving liability a services contractor carries. Materials can sometimes wait and subcontractors can sometimes be negotiated, but a missed pay cycle costs you the workforce performing the contract, and on a services award that workforce is the deliverable.

It usually fits when:

• Your award is FTE-based and labor is the dominant cost: staffing, janitorial, security, facilities, professional services
• You have performed work you cannot yet invoice, and the gap is between the pay date and the billing date rather than after the invoice
• You have scaled headcount for a new award and are billing in arrears, which is why the fastest-growing contractors feel this hardest
• Your people are cleared or credentialed and losing them means months to replace, not weeks

Something else fits better when:

• The invoice has already gone out. That is a receivable, and factoring is the cheaper way to fund it
• Your costs are mostly materials or equipment rather than people. Purchase order financing or equipment financing fit those
• You have not started performing yet and need to stand the contract up. That is mobilization funding
• You want one facility covering every stage rather than payroll alone. A contract line of credit covers mobilization, payroll and receivables in a single structure

What does "earned but unbilled" mean?

This is the concept the product turns on, and it is worth being precise about because it is what separates payroll funding from factoring.

Factoring funds a receivable: work delivered, invoiced, and waiting to be paid. Payroll funding funds the stage before that: work your people have already performed, which is genuinely earned revenue, but which you cannot invoice yet because the billing period has not closed.

On a monthly billing cycle with a bi-weekly payroll, you can be two or three pay runs into a month before an invoice can legitimately go out, and another thirty to forty-five days from that invoice to payment. The people were paid on the fifteenth regardless.

That gap is structural. An agency paying in forty-five days is the system working exactly as designed. You cannot negotiate your way out of it, and it recurs on every billing cycle for the life of the contract.

What happens after you call

• First conversation. The award, the paying agency, your pay cycle and your billing cycle. The distance between those two is the thing being financed, and it usually takes a few minutes to establish.
• What we ask for. The contract or award letter, your payroll run-rate including taxes and benefits, your invoicing history with the agency, an accounts receivable aging, and, on federal work, your SAM.gov registration and CAGE code.
• Sizing. Against the fully loaded cost per pay period and the number of pay periods that run before payment arrives. On a bi-monthly cycle with a one week payroll delay, that is commonly around four payrolls to cover.
• Ongoing. Once live, the facility runs with the cycle rather than being re-underwritten each period, which is the point: payroll does not wait for a credit decision.

It is worth arranging before you need it. As Matt puts it, a three day gap in an invoice payment can be the difference between making and not making payroll, and at that point your options are whatever is fastest rather than whatever is best.

The questions contractors ask first

Can I really draw against work I have not invoiced? Yes, where the work has been performed under an active award. That is the distinction from factoring, which needs an invoice to exist first.

Will the facility grow if I win a larger award? Generally yes. Availability is tied to earned revenue under your contracts, so it scales as your billing scales rather than sitting at a fixed limit you have to renegotiate.

What if the agency pays late? That is the situation this exists for. The facility is sized around the gap rather than around an optimistic payment date, and slow payment is monitored rather than assumed away.

Does my workforce or the agency find out? Your employees see nothing different; payroll runs as it always does. Where payment is being directed to us, the agency is notified through an assignment of claims, which is routine and does not affect performance evaluation.

Is this cheaper than a bank line? Not always, and where a bank will underwrite you a line may well be the better answer. The relevant question is usually whether a bank will lend at your size and stage, not whether this is the lowest rate available in the abstract.

Does this work for state and municipal contracts? Yes, and it is common. State and local services awards run the same gap between performing work and billing for it, and some jurisdictions pay more slowly than federal agencies do. The prompt payment protections differ, which is a reason to size the facility against how your particular payer actually behaves.

What to plan for

• Headcount ramps faster than the plan. The most common cause of a facility being outgrown in month two. If the award allows or requires rapid staffing, size for the ramp rather than the steady state.
• The billing period closes late. Timesheet approval, subcontractor invoices arriving late, a government holiday. Each pushes the invoice out while payroll stays exactly where it was.
• An invoice is returned. Government invoices come back for documentation problems regularly, and a returned invoice restarts the payment clock while two more payrolls run.
• Burden counts. Payroll is not wages. Fully loaded cost including taxes, benefits and fringe runs well above the headline number, so size against the loaded figure.

How much does payroll funding cost?

Payroll funding prices against earned but unbilled revenue while it is outstanding, so cost tracks how long the gap between performing and being paid actually runs. Shortening your billing cycle reduces it, which is worth knowing before you finance anything.

What determines the rate is the agency, the contract, your payroll run-rate and your billing history. Tell us the award and your pay cycle and you will have a number quickly.