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Payroll funding vs Invoice factoring
Should a staffing agency use payroll funding or invoice factoring?
The verdict
Use payroll funding if you run contract or temp desks: it pays contractors on time and funds the invoice in one process. Use factoring if you already have back office and payroll handled and simply need the receivable turned into cash faster and cheaper.
Reviewed by James Doyle · Updated 2026-09-16
Side by side
| Factor | Payroll funding | Invoice factoring |
|---|---|---|
| What it solves | Weekly payroll and the invoice gap together | The receivable only |
| Back office | Usually bundled — timesheets, invoicing, credit control | Rarely included; you keep running payroll |
| Typical cost | Discount fee plus margin over base, often bundled with service fee | 1% to 3% of invoice value plus interest on the advance |
| Cash released | Payroll covered in full, invoice funded | 85% to 95% advance, reserve released on payment |
| Speed to set up | Days to a few weeks, includes onboarding of payroll | Days; lighter process |
| Best fit | New contract desks scaling headcount fast | Established agencies with mature back office |
Choose Payroll funding if
- You are placing contractors weekly and cannot miss a payroll
- You have no back office and do not want to build one yet
- Headcount is growing faster than your cash
Choose Invoice factoring if
- You already run compliant payroll in-house
- Your problem is client payment terms, not payroll timing
- You want the cheapest possible cost of funds per pound or dollar advanced
The difference is what gets funded
Factoring funds an asset you already own: an issued invoice. Payroll funding funds the whole cycle, including the payment you have to make before that invoice exists. In contract staffing the payment comes first, which is why the distinction matters more here than in most industries.
A desk that wins a ten-head rollout in week one has a payroll obligation in week two and an invoice that settles in week eight. Factoring helps in week eight. Payroll funding helps in week two.
Compare the total cost, not the headline rate
The headline discount fee is rarely the biggest number. Minimum-term commitments, minimum monthly fees, concentration limits, audit charges and bundled back-office fees usually move total cost more than a 0.5% difference in rate.
Model both against the same twelve-month growth plan. A cheaper facility that caps at one client's concentration is more expensive than it looks the moment your anchor client doubles.
Common questions
Is payroll funding more expensive than factoring?
Per pound advanced, usually yes, because the fee typically bundles back-office processing — timesheets, invoicing and credit control. Compared against hiring the equivalent in-house team, it is usually cheaper for an agency under about 100 contractors.
Can I switch from factoring to payroll funding later?
Yes, but check the notice period and minimum term on your current facility first. Twelve-month minimum terms with three months' notice are common, and exiting early can cost more than a year of the rate difference.
Do funders lend to brand-new staffing agencies?
Yes. Staffing funders underwrite your clients' credit quality and your compliance process more than your trading history, which is why a new agency with two strong debtors can secure a facility in weeks.
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