Punitive Minimum Borrowing Requirements in Payroll Funding Agreements
Steve Capper,Flexible Funding - July 19, 2017
Borrowing less from payroll funding services is most often a good thing. Most would agree it should not be punitive.
If a payroll funding company has a funding program with an annual or daily interest rate on the amount borrowed, it is quite a different animal than another funding company that has an
annual or daily interest rate on the amount borrowed WITH A MINIMUM MANDATED BORROWING LEVEL. It is very easy for some to dismiss the mandated borrowing level believing that your company would always simply meet the minimum. It is important to understand exactly how very punitive it is if you do NOT meet the minimum.
The payroll funding math on how a minimum mandated borrowing level becomes
Suppose a funding company gives your staffing firm a one million dollar credit line but establishes a $500,000 minimum loan level at all times. Suppose the interest rate was stated as 17% annually. The daily rate would be 17% divided by 360 days = .0004722.
.0004722 x $500,000 loan = $236.10 per day 236.10 per day x 30 days = $7083 for a month
If you take the loan cost for the year divided by the funds that were loaned by the staffing payroll funding company, factor or bank, it will give you a double check on the interest rate.
7083 divided by 500,000 = .014166 per month x 12 months = 17% annually
Now suppose you do not meet the minimum funding company borrowing level because your business drops, is seasonal, or your temporary staffing agency happens to get some investor capital. Or, maybe the temporary staffing business is successfully profitable and just doesn’t need as much money.
Suppose the loan you need is now only $300,000 but because of a mandated minimum borrowing level of $500,000– the fees and/or interest associated with the $300,000 lower loan would still be the same as if you had a $500,000 loan which is $7083.
Take the loan cost for the year divided by the lower funds that were loaned by the staffing payroll funding company, factor or bank.
7083 divided by $300,000 = .02361 per month .02361 x 12 months = 28% annually
Staffing agency borrowers learning of these calculations are generally not thrilled about a jump from a 17% to a 28% annual rate should there be an opportunity or need to borrow less.