Avoid Long-Term Payroll Funding Contracts | Flexible Funding
Steve Capper/Flexible Funding - August 19, 2020
Nearly all payroll funding companies have long-term contracts and most of the invoice factoring companies also have them. Flexible Funding does not have long-term agreements, and for good reasons to be explained below. By long-term agreements we mean a payroll funding contract term of one year, eighteen months, two years or three years, enforceable by costly termination fees or by costly lawsuit. We have never seen a contractwith an initial term of longer than three years. Automatic renewal clauses that renew your term at the end of the current term (unless you notify the payroll funding company otherwise within the proper notification time window) can extend the contract for another year, or another term equal to the initial term.
There are many reasons why you should not be in a long-term contract.
Staffing companies should want to continue working with us funding companies because they are happy with what we offer, not because they are stuck with us. Why be in a business relationship with someone that doesn't want to be in a business relationship with you?
A funding company can provide weak service and ignore complaints or be slow to react to your complaints. In long-term contracts there are no escape clauses just for poor service alone...and poor service may be your subjective opinion. When a payroll funding company does not have you in a long-term contract, the funding company has to earn your business every day. If your business changes to the extent that a price reduction is well deserved, a funding company can use the long-term obligation as a reason not to renegotiate. They can tell you that the renegotiation will be at or near the end of the contract term, which could be months or even years away...which means that you may not be getting fair market price. You should not be held in a long-term funding contract because of a funding company's insecurity about their marketing and inability to replace lost customers. Flexible Funding believes that there is enough business for all of the funding companies, that our marketing is good enough, that our reputation and service are strong enough, and referrals frequent enough to drive new business so that we don't have to handcuff our existing customers into staying with us.
How might a funding company justify a long-term contract commitment? A funding company may justify their long-term requirements by the stated need to recoup research due diligence costs associated with evaluation of your company as a potential customer and other on boarding costs. The logic is not always sound; if you are doing any real sales volume, it is unlikely to take a year to recoup basic due diligence costs. Part of the recoupment needs can be dependent on the funding company's level of extravagance; when it comes to their prospects , if the fundingcompany execs and salespeople wine, dine, golf and entertain frequently at a costly level, you are more likely to be held in a long term to help pay for it all. On the other hand, a new startup staffing agency might well warrant a one year term contract (or longer) to recoup due diligence and setup costs especially when the agency is slow to ramp up. From the startup agency's perspective, they don't know for sure if the business will really succeed and are often wary of long-term commitments with early termination penalties.
A funding company with long-term contracts will sometimes pitch a prospect that a long term contract is beneficial because it supposedly "commits" the funding company for a year, or more. (Or infer that a funding company without a long term-contract will back out on you.) That a funding company has a long term time frame does not necessarily commit the funding company for the full term because the contracts are usually written up one-sided in favor of the funding company, with escape clauses for items determined at the funding company's discretion, or with minimum volumes that must be met. Funding company's that don't have long-term contracts don't back out any more than funding companies that do have long-term contracts, and if either one ever does it tends to be for the same reasons.