Calculating Actual Payroll Financing Rates

Steve Capper/Flexible Funding - August 19, 2020

Staffing industry management in need of financing go into the accounts receivable marketplace and get interest rate quotes from various funding organizations, but the quotes are not always an apples-to-apples comparison. Only a tiny handful of owners, managers, or their advisors pay adequate attention as to how the funding interest rate is "calculated".

One method by which higher annual percentage rates are achieved by many bank owned funding companies (and some other independently owned payroll funding companies) is by using a 360-day based annual calculation of rate, rather than a more accurate 365-day based calculation.

Example:

Suppose two separate companies are offering a 17% annual interest rate and the loan was going to be $500,000. Company #1 uses a 365 days per year calculation and company #2 uses a 360 days per year calculation.

• a) Company #1 takes 17% divided by 365 days = .0004657 daily rate
  .0004657 daily rate x 500,000 loan =$232.85 interest per day
  $232.85 interest per day x 365 actual days = $84,990.25 annual cost
• b) Company #2 takes 17% divided by 360 days = .0004722 daily rate
  .0004722 daily rate x 500,000 loan = $236.10 interest per day
  $236.10 interest per day x 365 actual days = $86,176.50 annual cost
• c) $86,176.50 - $84,990.25 = $1,186.25 difference in cost
  Both payroll funding services quoted the same rate but company #1 is actually less.
• d) Company #1 is actually = 17% Company #2 The additional annual cost of $1,186.25 divided by the funds that are loaned of $500,000 = .237 additional rate
  
  Total rounded up rate for #2 = 17.24%

(Flexible Funding is one of the national payroll funding services that uses the more accurate lesser-lesser cost 365-day based calculation.).

Some would like to have the extra $1186 in their pocket and other staffing agency funding shoppers may feel this percentage increase is insignificant. Where it can become more significant is when this increase is added CUMULATIVE onto other rate quote- rate calculation differences between companies. Two payroll funding company sales representatives could verbally quote a 17% annual rate. One representative wanting to get the deal in the door for consideration might leave out of his or her verbal quote the fine-print matter that the rate is actually 17% PLUS a 3-month LIBOR bank borrowing index. This can add another half a percent onto the rate. While this may be insignificant in the opinion of the funding sales representative or the company they represent, it may be significant to you when cumulative on top of other rate "calculation" increases and other expense add-ons.

UCC Uniform Commercial Code Expense Add Ons

A new cost-increasing development is taking hold in the world of lending to staffing organizations that payroll funding shoppers should be aware of.

A UCC Uniform Commercial Code filing is a form that is sent to the Secretary of State (in the state where your business entity is domiciled) which becomes public record. It gives notice of the collateral for a loan, and helps to perfect the security interest in the collateral... primarily accounts receivables. A significant percentage of payroll financing organizations and every bank organization has contract agreement language that allows them to pass on the costs of UCC Uniform Commercial Code filings to the staffing agency debtor.

For many years these filing fees have been negligible-- under twenty five dollars for a single filing. More recently however, some states are strapped for cash and have begun to put new taxes on UCC filings as part of the filing fee. A typical structure is .11 eleven cents per hundred dollars.. An $800,000 max credit line costs approximately $800 out of the gate before you have ever funded one penny. A payroll financing firm may want to make sure the entire maximum credit line being offered is covered and have the tax paid upfront on the maximum....the actual loan you eventually take may or may not reach the maximum credit line being offered. Payroll funding contracts that require you to pay the UCC fees establish that you will be paying ALL the UCC costs. They normally do not specify or itemize the costs, or discuss maximum-amount caps to the costs.

Just about all of the state governments in the U.S. are strapped for cash. We can surely expect other states to follow and add such a UCC filing tax to be passed on to you --in addition to filing, administrative or recording fee--in the future.