When it comes to small business financing options, most companies have been limited to using banks and credit unions. Of course as the global recession deepened, and customers took longer and longer to pay invoices, those same banks were more than willing to increase interest rates to those businesses fortunate enough to still qualify for credit. For the small business owner, pursuing alternate financing options has become a priority. One of these options is invoice factoring. However, factoring not only allows small businesses to secure the working capital needed to support their day to day operations, it’s also a great tool to cover a company’s payroll tax.
Even though most businesses have done away with manual payroll processes, there are still mistakes being made. For the small business owner, trying to keep up with all the tax laws and government regulations is never easy. With 2011 federal tax laws in effect, small businesses must have everything lined up or risk facing fines for late or incorrect filings. In fact, over 50% of businesses are forced to pay some kind of fine every year.
The IRS has a number of avenues to pursue with respect to those businesses unable to pay their bills. They can put a lien on assets or seize them entirely. However, one asset that small businesses can tap into come tax time is their customers’ unpaid invoices. In fact, it’s these unpaid invoices that are the basis for what is commonly referred to as receivables factoring. So, how does factoring work?
Factoring allows small businesses to use their customer’s unpaid invoices as a form of business collateral. The factoring company essentially purchases the invoice, advances the small business the necessary funds and then proceeds to collect on the invoice directly from the customer. The portion that’s advanced is approximately 80% to 90% of the invoice’s value. Once the customer pays the invoice in full, the financing company returns the difference back to the small business minus their fees.
The table and video above are taken from the post: Sample Receivable Factoring Excel Sheet: Effective Rates & Interest Rates
In terms of payroll taxes, some factoring companies will forward money directly to the IRS on behalf of their customers. However, it’s always best to have the money in hand. If you decide to go the route of using factoring during tax time, make sure to call your customers in advance to advise them that the factoring company may be collecting on the invoice. Or, you could simply treat the factoring company as your accounts receivable outsourcing firm. After all, it really is like outsourcing your receivables collection.
Whatever the case, don’t allow those late IRS payroll tax bills to accumulate. They can and will become expensive. In addition, they are costs that directly impact your company's bottom line and for the most part, they are completely avoidable.
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